Under perfect competition the economic welfare of a market structure will greatly determined by those economic circumstances under which a perfectly competitive market thrives. The basic characteristics are: -
1. Large number of sellers and buyers - the firms are infinite such that no individual is able to influence the market i.e.
(Eaton, Diane and Douglas, 2002 pp.93)
The firm is in equilibrium if it maximizes profit defined as the difference between revenues and costs (** = R-C). The equilibrium point is where the firm produces the output that maximizes the difference between TR & TC curves as shown below.
In the short term the firm will either be making excess profits or losses depending on the position of an AC curves i.e. if the AVC curve lays below the price the firm is making excess profit as shown below.
It is only possible for the firm to be equilibrium. The short run without necessarily breaking even point. However, in the long run the firm will either make neither losses nor excess profit i.e. the break even point will be the equilibrium point for the firm as shown below.
The supply of such a firm may be derived by the points of intersection of MC curve with the successive demand curve. Assuming that the market prices increase gradually the demand curve will tend to shift upwards. Given the slope of the MC curve is positive each higher demand curve cuts the given MC curve on a point which lies to the right of the previous intersection. ...