perfect competition

perfect competition

The assumptions of perfect competitions	- the industry is made of a very large nmber of firms - each firm is so small that they have no effect on the market if they change output - all the firms produce homogenous products - firms are completly free to enter and leave the market as they choose. -all producers and consumers have perfect knowledge of the market Good example is agricultural
Profit maximimization
Possible short run profit and loss	Short run abnornmal profits Short run losses
Short run abnormal profits to long run norma l profits
Short run losses to long run normal profits
Long run equilibrium in perfect competion
Productive and allocative efficiency in perfect competition
Allocative efficiency •Allocative efficiency (the socially optimal level of output) occurs where suppliers are producing the optimal mix of goods and services required by consumers. •Price reflects the value that consumers place on a good and is shown on the demand curve (average revenue) •Marginal cost reflects the cost to society of all the resources used in producing an extra unit of a good, including the normal profit required for a firm to stay in business. •Allocative efficiency occurs where marginal cost (the cost of producing one more unit) is equal to average revenue (the price received for a unit). •MC=AR [allocatively efficient (socially optimal) level of output]
Productiove and allocative effeciency in the short run in perfect competition
Productive and allocative efficiency in the long run in perfect competion