supply demand curves of short term market shifts for perfect competition

Firms will be allocatively efficient P=MC.This will cause supply to fall causing prices to increase. Firms will now start making a loss and therefore firms will go out of business.The AC curve will increase therefore ARThis will attract new firms into the market causing price to fall back to the equilibrium of Pe This will cause firms to make supernormal profits. If there is an increase in demand there will be an increase in price Therefore the demand curve and hence AR will shift upwards. The effect of an increase in demand for the industry. It is often argued that competitive markets have many benefits which stem from this theoretical model. However perfect competition is as important economic model to compare other models. The features of perfect competition are very rare in the real world. If firms are making a loss then firms will leave the industry causing price to rise If supernormal profits are made new firms will be attracted into the industry causing prices to fall. What happens if supernormal profits are made? In the long run firms will make normal profits.The individual firm will maximise output where MR = MC at Q1.The industry price is determined by the interaction of Supply and Demand, leading to a price of Pe.There is perfect information and knowledge.All firms are price takers, therefore the firm’s demand curve is perfectly elastic.All firms produce an identical or homogeneous product.Freedom of entry and exit this will require low sunk costs.Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures.

Perfect competition is a market structure where many firms offer a homogeneous product.

Supply demand curves of short term market shifts for perfect competition