Group 1 - Perfect Competition

- A firm will maximize profit when it
produces the output level where marginal

Market structure refers to the competitive
cost is equal to marginal revenue.
environment in which buyers and sellers operate.
It refers to the characteristics of a market such as Equilibrium of a Perfectly Competitive Market
the number of and size of buyers and sellers,
– A perfectly competitive market is in
similarity or type of product bought and sold,
short-run equilibrium when all the
degree of mobility or resources, entry and exit of
firms in the market are producing the
firms and input owners and degree of knowledge
profit-maximizing output level.
of economic agents regarding prices, costs,
– A perfectly competitive market is in
demand and supply conditions.
long-run equilibrium when firms that
Market structures may be classified as either wish to leave the market and potential
perfect competition, monopoly, monopolistic firms that wish to enter the market
competition and oligopoly. have done so. In other words, a
perfectly competitive market is in
long-run equilibrium when the
PERFECT COMPETITION number of firms in the market is
- Occurs when there are many sellers, there is constant.
easy entry and exiting of firms, products are
identical from one seller to another, and
sellers are price takers. The Shut-down Condition
– If a firm is making subnormal profit (i.e.

negative economic profit or economic loss)
Characteristics of Perfect Competition: which means that the total revenue is less
than the total cost, it does not mean that it
1. Large number of small firms should shut down production. In the short
• In perfect competition, there are a large run, a firm should continue production so
number of small firms each with a small long as the total revenue is greater than or
equal to the total variable cost.
market share.
2. Homogeneous products
Supply Curve in Perfect Competition
• In perfect competition, firms sell – Recall that the supply of a good is the quantity
homogeneous products that are perfect of the good that firms are able and willing to
substitutes. sell at each price over a period of time, ceteris
paribus, and the supply curve shows the
3. Perfect knowledge
quantity supplied at each price. The portion of
• In perfect competition, consumers and firms the marginal cost curve above the average
have perfect knowledge about the price, variable cost curve of a perfectly competitive
quality, availability and production firm is the supply curve. As the supply curve
technology of the product. shows the quantity supplied at each price, this
means that given the price of a good, the
4. Price-takers quantity supplied is determined entirely by
the supply curve.
• Due to small market share, product
homogeneity and perfect knowledge,
perfectly competitive firms are price- Advantages of Perfect Competition
takers in the sense that they are unable to 1. Firms always achieve efficient allocation
influence the market price by changing
• Efficient allocation happen when the price of
their output levels.
the goods is equal to the marginal cost that
5. No Barriers to Entry produce the goods.
• In perfect competition, there are no barriers 2. Firms always achieve efficient production
to entry which means that firms can make • Firm production efficiency refers to the ability of
only normal profit in the long run. firms to produce goods at the minimum
average cost.
• In the long run, perfectly competitive firms earn
The Profit-maximizing Condition only normal profit at the equilibrium point.
3. Non-price competition cost savings

• In a perfectly competitive market, the goods
produced are homogeneous and consumers
have perfect knowledge of the market. Hence,
the firm does not need to allocate resources
such as advertising and sales promotion in
non-price competition.
• Non-price competition cost saving production
cost and thus benefit consumers in the form of
lower selling prices.
4. Freedom to choose and act
• In a perfectly competitive market, the individual

is free to make choices about the kind of
economic activity that is to be made and the
type of goods to be purchased. Production
factors easily and move freely to get the best
returns.
• Manufacturers are also free to determine the
type and quantity of goods to be produced.
Disadvantages of Perfect Competition
1. No encouragement of research and Innovation
• In the long run firms only normal profit only.

Firms do not have sufficient resources and
incentives to conduct research to improve
product quality.
• Market driven to innovation in creating new
products because without restrictions such as
patents and copyrights.
2. Limited consumer choice
• Perfect competition does not take account the

vagaries of various consumer preferences for
goods produced are homogeneous.
• Consumers in a perfectly competitive market
can not enjoy the pleasure of buying things
different patterns in terms of design brand
and packaging design according to the taste.
3. Create social costs
• Pursuit of production efficiency and resource

allocation may create a variety of adverse
social costs society. For example,
environmental pollution and neglect the
welfare of workers.
4. Not enjoy economies of scale
• Inability of firms producing massive lead firm

can not enjoy the benefits of economies of
scale that can lower production costs.
Therefore, the cost of production and selling
price perfectly competitive firm may be higher
than the monopolistic benefit of economies of
scale when conducting large-scale operations.

Group 1 - Perfect Competition

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Group 1 - Perfect Competition

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- A firm will maximize profit when it

produces the output level where marginal

– If a firm is making subnormal profit (i.e.

3. Non-price competition cost savings

4. Freedom to choose and act

• In a perfectly competitive market, the individual

Disadvantages of Perfect Competition

1. No encouragement of research and Innovation

• In the long run firms only normal profit only.

2. Limited consumer choice

• Perfect competition does not take account the

3. Create social costs

• Pursuit of production efficiency and resource

4. Not enjoy economies of scale

• Inability of firms producing massive lead firm

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