Question

Perfect competition is the category of industry structure that is used as a benchmark for comparison. So it is important that you know it.

(part a) List four characteristics of a perfectly competitive market.

(part b) Is it possible for firms to earn positive economic profit in the long run? Explain why or why not.

Answer 1

Part Perfect_Competition> A perfect competition alto known as an atomistic market. It is defined by several idealizing conditions, collectively . whore conclition of bryleet competition hold it has been demonstrated that a market will an equili brium in gobtality supplied for every product 35 odezvice, including tabour, equal the quantity deman- -ded at current bice. Marginal cost is equal to Average Revenue CMC=AR) * characteristics of a perfectly competitive in marketa & Large Number of Bayers and sellers, 2 Homogeneous Precluct. Independent Recision making Ą Perfect knowledge § Profit maximization but - 8 Partive economic Dafit in the long-run indirm.; In long- van equilibrium position perfectly competitive from earns only normal profit and position of equilibrium SMC=1MCAR-Min. LAC - SAC This point is called point of opti mum output. the firm to operate onder ledbes and it can leave the Industry. ± There is no compulsion an fo perfectly competitive from No firm can earn super normal profits. This is because when a from earn super- normal profit, it attracts new froms to industry. This leads to an mornose in supply which results in lowering the prices and normalizing of poolits. ya LMC LAC » ARg = MRg P2 EU AR, =MRI Priced cost E 50 >ARO=MRO Po ty M Mo M M2 out but The Jiom operates Under Constant wreturn to scale MC=AC Mc=MC с AC=AR We have AC=AR= MC = MR