Perfect competition is a market structure in which there are many small firms, all producing homogeneous products and all trying to sell their products to a large number of buyers. In this type of market, firms are price takers, meaning that they have to accept the market price for their products and cannot influence the price through their own actions.
In the short run, a firm in a perfectly competitive market can make a profit or a loss. If the price of the product is greater than the average total cost of production, the firm will make a profit. If the price is less than the average total cost, the firm will incur a loss.
In the long run, however, firms in a perfectly competitive market will only stay in business if they are making a profit. If a firm is incurring losses in the short run, it will eventually go out of business unless it can find a way to reduce its costs or increase its price. On the other hand, if a firm is making a profit in the short run, new firms will enter the market, attracted by the high profits. This increased competition will lead to a decrease in the price of the product, which will reduce the profits of the existing firms. Eventually, the price will fall to the point where it is equal to the average total cost of production, and the firms will be making zero economic profit. This is the long-run equilibrium in a perfectly competitive market.
In the long run, firms in a perfectly competitive market will also have an incentive to innovate and find ways to produce their products more efficiently. This will allow them to reduce their costs and stay competitive in the market. As a result, the overall supply of the product will increase, leading to a decrease in the price.
Overall, the long-run equilibrium in a perfectly competitive market is characterized by firms making zero economic profit and producing at the lowest possible cost. This leads to an efficient allocation of resources, as firms will produce at the lowest possible cost and sell at the lowest possible price. Consumers will also benefit from this market structure, as they will be able to purchase products at the lowest possible price.
Equilibrium of a Competitive Firm in the Short Run and Long Run
Profit becomes maximum only when a firm reaches equilibrium. Thereby, in the short-run, it may be possible for an individual firm to make supernormal profit. This long-run equilibrium is shown in the diagram below. This collected information is used to sort out the users based on demographics and geographical locations inorder to serve them with relevant online advertising. In a word, in contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn supernormal profit in the long run, which is to say that a firm cannot make any more money than is necessary to cover its economic costs. Since we assume equal costs of all the firms of industry, all firms will be in equilibrium in the long-run.
Perfect Competition: Definition, Graphs, short run, long run
The left side of the figure represents the industry and the right side the case of a firm. We get a long run supply curve e 1e 2 by joining e 1 and e 2, which is a straight line parallel to quantity axis. But for industry to be in full equilibrium, in the short run, is very rare. There are no advertisement or other sales promotion activities. Naturally, since the time a firm takes to set up in business varies from industry to industry, the length of time before the long run is reached also varies from industry to industry. However, to gain or maintain monopoly position is actually a very difficult process.
Long
Depending on its costs and revenue, a firm might be making large profits, small profits, no profits or a loss; and in the short run, it may continue to do so. The goods being sold must be homogenous in nature If these conditions are met, then the industry is in perfect competition Sloman 2005. In the long run, the firm can exit the industry or can vary the plant size. If the industry is operating under increasing cost conditions or under diminishing returns to scale , the long run industry supply curve will be positively sloped. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. Due to the high barriers to the entry of new firms, the supernormal profits derived from the monopoly will not be competed away in the long run. If the existing firms are making an excess profit, new firms will enter the industry.
