Perfect Competition

Perfect Competition

Perfect competition

Short-run equilibrium of firm and industry (profit maximising)

Short-run equilibrium of industry and firm under perfect competition P

£

MC

S

D = AR = MR

AR AC

Pe

D O

O Q (millions)

(a) Industry

AC

Qe Q (thousands)

(b) Firm

Perfect competition

Optimum position for a loss-making firm

Loss minimising under perfect competition

P

£ S

AC P1

AC

MC

D1 = AR1

AR1

= MR1

D O

O Q (millions)

(a) Industry

Qe Q (thousands)

(b) Firm

Short-run shut-down point

P

£ S

MC

AC

AVC D2 = AR2

AR2

P2

= MR2

D2 O

O Q (millions)

(a) Industry

Q (thousands)

(b) Firm

Perfect competition

Short-run supply curve of the firm

Deriving the short-run supply curve

P

£

S

MC = S a

P1 P2

b c

P3

D1 = MR1 D2 = MR2 D3 = MR3

D1 D3 O

Q (millions)

(a) Industry

D2 O

Q (thousands)

(b) Firm

Perfect competition

The industry supply curve

Deriving the industry short-run supply curve

P

£

S

S a

P1

b

P2

c

P3

D1 = MR1 D2 = MR2 D3 = MR3

D1 D3 O

D2 O

Q (millions)

(a) Industry

Q (thousands)

(b) Firm

Perfect competition

Long-run equilibrium

Long-run equilibrium under perfect competition Profits return Supernormal New firms enter to normalprofits P

£

S1 Se

LRAC P1

AR1

D1

PL

ARL

DL

D O

O Q (millions)

(a) Industry

QL Q (thousands)

(b) Firm

Long-run equilibrium of the firm under perfect competition £

(SR)MC (SR)AC

LRAC

DL AR = MR

LRAC = (SR)AC = (SR)MC = MR = AR

O

Q

Perfect competition

Long-run industry supply curves

Various long-run industry supply curves under perfect competition

S1

P

S2

b

a

c

D1 O

Long-run S

D2 Q

(a) Constant industry costs

Various long-run industry supply curves under perfect competition P

S2

S1 b

Long-run S

c a

D2 D1 O

Q

(b) Increasing industry costs: external diseconomies of scale

Various long-run industry supply curves under perfect competition P

S1 S2

b

a c Long-run S

D1 O

D2 Q

(c) Decreasing industry costs: external economies of scale