- Long-run equilibrium
- A perfectly competitive market is in long-run equilibrium when no new firms want to enter and existing firms do not want to leave, as supernormal profits have gone.
- Price taker
- A price taker is a firm that must accept the prevailing equilibrium price in its market, because the pressure of competing firms forces it to.
Short-run outcomes for a price taker
Can you name the three short-run outcomes for a perfectly competitive firm?
The firm produces where P = MR = MC, and where the market price falls against its cost curves decides what it earns.
Supernormal profit in the short run is when the market price is above the lowest point of average total cost, so price exceeds average cost at the chosen output.
Can you think of an example?
Demand for oat milk surges and the market price rises to £1.20 a carton. A farm making 10,000 cartons at an average cost of £1 earns £2,000 above normal profit.
A loss but stay open is when price is below average total cost but above average variable cost, so revenue covers every variable cost and part of the fixed cost.
Can you think of an example?
The price falls to 90p, below the farm's average cost of £1.05 but above its average variable cost of 70p. Staying open loses less than shutting down, while its fixed costs must be paid.
Shut down is when price falls below the lowest point of average variable cost, so producing adds more to cost than to revenue and the firm stops producing.
Can you think of an example?
The price falls to 60p, below the lowest average variable cost of 65p. Each carton made loses money even before rent, so the farm stops producing and pays only its fixed costs.