Types of the services and commodities produced in perfect competition are undifferentiated (homogenous) i.e. the commodities produced are alike and because of this cause there is Promotion, marketing or publicity. Though it is not possible for a firm to be perfect model of perfect competition but there are some that are nearer for example; Stock Market, as there are lots of purchasers and vendors, no obstructions to entry and the good is not differentiated. (Mahanty, p. 264)
There is absolute sovereignty of admission of new firms into the Market. Firms already operating in the market are not capable to prevent new firms enter the business. Starting a business takes time, therefore freedom of entry concerns in the long run. An extension of this assumption is that there is complete factor mobility in the long run. If earnings are elevated than somewhere else, resources will be liberally attracted into that business. Similarly if wages are elevated than for comparable labor somewhere else, employees will liberally shift into that business and will face no hurdles. (Schnaars, p. 31)
If the firm's average cost (AC) curve (which incorporates normal profit) hangs beneath the firm's average revenue (AR) curve, the firm will make abnormal profit. Abnormal profit for each unit at Q1 is the vertical gap amid AR and AC at Q1. Entire abnormal profit is shown by the rectangle P1ABC in Figure 1.1.
There is also a situation when the firm cannot earn a...
Abnormal profit for each unit at Q1 is the vertical gap amid AR and AC at Q1. Entire abnormal profit is shown by the rectangle P1ABC in Figure 1.1.
There is also a situation when the firm cannot earn a profit at any level of production. This condition would arise if the firms AC curve were on top of the AR curve at each and every point. This is shown in figure 1.2, where the industry price is P2.In this situation, the position where MC curve intersects MR curve signifies the loss minimizing position .The total of loss is represented by the rectangle P2FED. (Parkin, p. 240)
Figure 1.1 and Figure1.2: Adopted from "Market Structures"
Pricing strategies in Perfect competition and Price Elasticity of demand
Pricing with no market control (perfect competition) is resolute in the industry (Market) by the meeting point of supply and demand. At this price the firm countenances a flat (horizontal) demand curve. See figure below, it demonstrates that the firm is able to trade all it can manufacture at the Industry (market) price (P1), but not anything at a price over P1. Which denotes that firm in Perfect Competition countenances perfectly elastic demand curve.
Figures Adopted from "Market Structures"
Therefore, all firms are price takers affirming their price at the Industry price of P1. Demand Curves of All firms are perfectly elastic. For an instance assume a firm might lower its price beneath P1 to seek and take some industry share from their rivals, but there is no need because all firms can trade as greatly as they desire at price P1.
Advantages and Limitations of operating in a Perfect Competition
1. Price equals marginal cost.