When we talk about perfect competition we mean a market structure that leave firms in a unique brand of competition. In fact a firm does not actually compete under perfect competition, it reacts to the market conditions, taking price and other market factors as beyond its control. A market is a perfect competition if it meets four basic criteria. The product of all sellers must be identical. All participants in the market, buyers, sellers, must be small relative to the entire market. As a result there should be many firms and buyers in the market. There are no barriers to entry or exit to the market. Firms can enter and leave as they wish. Fourthly market participants have perfect knowledge of and access to technology and prices.

When a firm fulfils these criteria it can then be categorised as a price taker. Those firms who are unconcerned about there competitors, because there is nothing they can do to influence there own behaviour, that of their rivals or the final market outcome. As shown in Fig 1 the price takers demand curve is perfectly horizontal. At the market price

Fig 3 - Equilibrium Positions for a Competitive Firm

The question asks what will happen in the long run when price exceeds short run average cost. We must first determine the objective of the firm, - profit maximisation. Any typical firm will set production where marginal revenue equals marginal cost. A perfectly competitive firm however, taking into account the relationship between marginal revenue and price will achieve profit maximisation by setting output where marginal cost equals price. The profit maximising firm in perfect competition will produce where P=MC We can see the firms production condition by showing marginal cost, average cost and variable costs curves on the firms demand curve. As depicted in Figure 2. The figure uses short run cost curves as production decisions occur in the short term.

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, average cost, perfect competition, Appendices Fig, average costs, Firm Fig, run average, short run, market price, price exceeds, Run Equilibrium, run equilibrium, Costs Fig, competitive firm, run average cost, Competition Fig, profit maximising, Competitive Firm, exceeds average cost, minimum run average, short run cost, run average costs,
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