Perfect competition in the short run and long run

Learning objectives

Describe the characteristics of perfect competition (many small firms, identical products, free entry and exit, perfect information) and explain why each firm is a price taker

Draw side-by-side market and firm diagrams showing the firm's horizontal demand curve at the market price where P = MR = AR, and identify short-run profit, loss or break-even

Explain why the firm's short-run supply curve is its marginal cost curve above average variable cost

Explain how entry and exit move the market to long-run equilibrium where price equals minimum average total cost and economic profit is zero

Explain why long-run equilibrium is both allocatively efficient (P = MC) and productively efficient (P = minimum ATC)

Trace the effect of a change in market demand on the firm's price, output and profit in the short run and the long run, and distinguish constant-, increasing- and decreasing-cost industries