(a) Stale three characteristics of perfect competition,
(b) With the aid of diagrams, explain equilibrium positions of a perfectly competitive firm in the: (i) short-run: (ii) long-run
Explanation
(a)(i) Large numbers of buyers and sellers such that no single buyer or seller
(ii) Homogeneous products: The products are identical.
(iii) Free entry and exit of firms. Firms are free to enter when profits are made and are free to exit when losses are incurred
(iv) Identical cost conditions : There are no differences in the cost of production of firms, e.g. no transport cost etc
(v) No governmental control: Forces of demand and supply regulate prices in the market.
(vi) Perfect knowledge: Producers and consumers have perfect knowledge of market conditions
(vii) Firms are price-takers such that a single price rules the market.
(viii) No preferential treatment since all buyers and sellers are treated equally.
(ix) Perfect mobility of factors of production
(b) (i) In the short run, a perfectly competitive firm attains equilibrium at an output where MC-MR
The firm is able to earn above normal profits as illustrated below.
The equilibrium output is Q. The firm earns abnormal profit as shown by the shaded portion where AR is greater than AC
(ii) In the long run, the perfectly competitive firm earns only by normal profit, where P = AR = AC =MR = MC and produces at the optimal point E as illustrated below
The firm is at equilibrium at the optimal point E where P = AC = AR = MR = MC. Equilibrium output is Q