PERFECT COMPETTION
In this example, imagine there is a local
market place with a single seller of a
homogenous product - potatoes
Perfect Competition
Market
S1
Price
P1
Individual firm
Revenue/
Costs
MC
P1
ATC
AR1 = MR1 = D1
D1
Q1
Quantity
At this point,
Initially
there they
is a single
are making
seller. They
‘take’ the price
abnormal
(supernormal)
set by theprofits
customers
equal
to the– red
P1 shaded area above
Q1
Quantity
Perfect Competition
Market
S1
Price
Individual firm
Revenue/
Costs
S2
MC
ATC
P1
P1
AR1 = MR1 = D1
P2
P2
AR2 = MR2 = D2
D1
Q1 Q2
Quantity
Q2
The
outward
shift
in to
supply
reduces
Motivated
by the
desire
make abnormal
Now costs are higher than revenue
profits
and with no
barriers
of entryand
more
the individual
sellers
average
and
eachenter
seller
ismarket
making a loss.
suppliers
the
marginal revenue.
Quantity
Perfect Competition
Market
Individual firm
Revenue/
Costs
S3
Price
MC
P3
P3
ATC
AR3 = MR3 = D3
D1
Q3
Quantity
Q3
In the long run, the price will equal
Firms now leave the market (there is
In
the long
all revenue
firms make
marginal
and run,
average
and no
freedom of exit) causing an inward shift in
more
firms
are motivated to leave or enter
normal
profits.
supply. Prices
rise to P3.
the market.
Quantity