1. A2 Microeconomics - Tutor2u
Aspects of Perfect Competition

2. Assumptions of a Perfectly Competitive Market
Each firm too small to affect
price via a change in supply
Homogeneous products that are
perfect substitutes for each other
Consumers have complete
information about prices
Transactions between buyers
and sellers are costless
All industry participants and new
entrants have equal access to
resources
No barriers to entry & exit of
firms in the long run
A price taker
Racecourse
bookmakers
Street Markets
How close are these markets to perfect competition?
Many firms
Transactions ‘costless’
Products not
homogenous (different
odds)
Many firms
‘Homogenous’ product
Some barriers to setting
up stall

3. Perfect Competition
Price,
Cost
Price, C
ost
Output
Output

4. Perfect Competition: The Market and Individual Firms
Price, C
ost
Market Supply and
Demand
Price, C
ost
Revenues, Costs and Profits for a
Competitive Firm
MC
MS
AC
P = AR =
MR
P
Abnormal profits
MD
Q
Output
Q
Output

5. Long Run Equilibrium under Perfect Competition
Price, C
ost
Market Supply and
Demand
Price, C
ost
Revenues, Costs and Profits for a
Competitive Firm
MC
S
S1
AC
P1= AR1 =
MR1
P1
Normal profits
D
Q1
Output
Q1
Output

6. Does Perfect Competition lead to economic efficiency?
Cost & Price
Perfectly Competitive Market
Entry of
new firms
drives
market
price lower
S1
P1
S2
P2
D1
Allocative Efficiency
The value consumers place on a good or service equals
the cost of the resources used up in production
MC
AC
Productive Efficiency
When the output is produced at minimum average total
cost
Dynamic Efficiency
The productive efficiency of a firm over a period of time.
Output (Q)

7. Does Perfect Competition lead to economic efficiency?
Cost & Price
Perfectly Competitive Market
Entry of
new firms
drives
market
price lower
S1
P1
S2
P2
D1
Allocative Efficiency
In the long and short run price is equal to MC – therefore
allocatively efficient
MC
AC
Productive Efficiency
In the long run, price is at lowest possible AC, therefore
productively efficient
Dynamic Efficiency
Output (Q)
Without drive to innovate products, the dynamic
efficiency in competitive markets is low.

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