vixenvin Posted May 9, 2009 Report Share Posted May 9, 2009 hey guys i'm reviewing for exams and i have a question, can someone please explain to me what a perfect competition diagram looks like for market structures? i'm having a lot of trouble grasping the concept..... oh, and my exam is in 2 days Reply Link to post Share on other sites More sharing options...
Max Posted May 9, 2009 Report Share Posted May 9, 2009 It's pretty simple:That depicts the short run. Firms are price takers, thus the perfectly elastic demand curve. There is perfect information in the market, the goods/services provided are homogeneous (i.e. they are the same) and barriers to entry are either non-existent or low. Usually, firms in perfect competition are profit maximizers, as they produce where MC = MR.In the short run, market supply is low and firms are able to reap supernormal profits since their demand curve is above the minimum of the AC curve. It follows that there is no productive efficiency, although there is allocative efficiency (P=MC).In the long run, firms are attracted by supernormal profits and enter the market. This increases the supply in the market, which lowers the market price. As a result, the firm's demand curve shifts down and supernormal profits are eroded:In the long run, the firm is productively and allocatively efficient. Reply Link to post Share on other sites More sharing options...
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