State the key assumptions and characteristics of a competitive market and outline the difference between the short-run and the long-run.

Perfect competition is a market structure defined by several key assumptions: a large number of firms, identical (homogenous) products, no barriers to entry (free entry and exit), perfect information and perfect resource mobility. As a result of these conditions, no single firm has any significant market power and the market structure achieves allocative (and in the long run also productive) efficiency.

Although there is free entry and exit, in the short-run firms cannot enter or exit the market as it takes time to make the necessary adjustments within the business. As a result, economic profits or losses can exist in the short-run. In the long run however, firms can enter or exit the market based on the incentive of profit, affecting the market supply and thus lowering or raising the market price, respectively. As a result, of this, firms in the perfectly competitive market will always earn a normal profit in the long-run.

JN
Answered by Jan Niklas F. Economics tutor

3147 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

How do you calculate the net social welfare loss due to a negative externality in production?


Outline the differences between the GDP, real GDP and green GDP.


Explain, with the help of diagrams, the effect of an increase in the price of petrol is likely to have on (i) The market for cars. (ii) The market for coal.


Explain two policies governments might use to redistribute income.


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences