Econ....about perfect competition

Perfect competition - under this situation, no transaction cost and all dealers are price takers.

1. Because all competitors have no difficulty to get information, they will sell the goods at a same price at all level of quantity. Therefore, the price (P) will always equal to the marginal revenue (MR) and thus the demand will be a straight line (perfectly elastic).

2. However, the marginal cost (MR) will diminish and then raise at a specific point. The average cost will cross with the MR at the minimum point. If the price falls under the minimum point, the business will shut down in the short run (there will be a profit in the short run, and no profit in the long run). It is because the revenue cannot cover the cost indeed.

3. In the long run, due to the no transaction cost, all competitors will do business until marginal cost (MR) to marginal revenue (MR). Therefore, profit will then be zero in the perfectly competition market.

Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a completely efficient outcome. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand.

In a perfectly competitive market, the firm is a price taker; that is, the firm accepts the current market price P and it has no control over the price. The condition to continue producing requires the price P to be higher than the AVC, i.e. the line representing market price should be above the minimum point of the AVC curve. If P is equal to AVC, the firm is indifferent between shutting down and continuing to produce. However if P is less than AVC, the firm should shut down completely, because then it is incurring some variable costs over and above its fixed cost.