Transcript Supernormal Profits made under Perfect Competition

Perfect Competition
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Short - Term :
Supernormal
Normal
Survival
Out of Business
Long - Term
Perfect Competition
Assumptions :
•Homogenous product.
•Price Taker.
•Perfect Knowledge.
•No barriers to entry / exit.
•Profit Maximisers @ MC = MR.
•Easily transportable.
•Large number of buyers and sellers.
Supernormal Profits made under
Perfect Competition (Short-Term)
THE FIRM
MC
P
MC=MR
ATC
D/AR/MR
AVC
ATCQ
Q
Normal Profits made under
Perfect Competition (Short-Term)
THE FIRM
ATC
MC
AVC
D/AR/MR
ATCQ/P
Q
Minimising Loss under
Perfect Competition (Short-Term)
THE FIRM
ATC
MC
AVC
D/AR/MR
ATCQ
P
Q
Close down Position under
Perfect Competition (Short-Term)
THE FIRM
ATC
MC
AVC
D/AR/MR
P
Q
Comparison of Perfect
Competition and Monopoly
Perfect Competition MC
Monopoly MC
MC=MR
P2
P1
D/AR
MR
Q2
Q1
Advantages of
Perfect Competition
•Price is just sufficient to give the firm a normal profit. Customer gets
product at lowest possible price, therefore is not exploited.
•Each firm must produce at its most efficient output.
•Public gets the greatest output from resources used to produce a good.
•Firms will develop new technology to earn supernormal profits.
•Advertising has no value and is stopped ; keeping down prices.
•There is an automatic reaction to changes in demand. When demand
changes, supply changes, due to the profit motive that causes firms to
enter and exit the industry.
Disadvantages of Perfect
Competition
•There is no guarantee of equal distribution.
•Wastage due to large - scale duplication of small firms.
•Small firms lack funds to invest in research and
development. Lack of will to invest due to rights of other
firms to perfect knowledge.
•Homogenous product leads to lack of variety.
•Large companies achieve economies of scale and produce
at lower cost than small firms. Market loses
competitiveness.