Perfect competition

• Large numbers of sellers and buyers

• Product homogeneity

• Free entry and exit of firms

• Price taker – DD curve is horizontal

• No government regulation

Equilibrium of the Firm

• For all firms, profit maximisation is achieved when marginal revenue, (MR), equals marginal cost (MC).

• If MR > MC, the firm adds more to revenue than it does

to costs by increasing output and sales. When this happens profits will rise.

• On the other hand, if MR < MC, the firm adds more to costs than it does to revenue by expanding output and sales.

• When this happens profits will fall. It follows thus, that the firm is in equilibrium when MC = MR.

Short Run – Abnormal Profits: Firm entering in market

Short Run – Loss: Firms leaving Indusctry

Long Run