Perfect Competition
Market Failure: Market Power
AO2·AO3·AO4·Diagram required·HL
Syllabus requirement
Many firms, free entry, homogeneous products. Firm is a price taker. Short-run and long-run outcomes under profit maximization.
Assessment objectives
AO2 Application and AnalysisAO3 Synthesis and EvaluationAO4 Use of Appropriate Skills
Required diagram: Diagram of a perfectly competitive firm showing abnormal profit, normal profit, and losses in the short run; and normal profit in the long run. Include market diagram showing equilibrium where P = MC and maximum community surplus (allocative efficiency).
Higher LevelThis topic is assessed at HL.
Summary
Perfect competition is a theoretical market structure used as a benchmark for evaluating real markets. It assumes many small firms selling a homogeneous product, price-taking behaviour, free entry and exit, perfect information and mobile resources; firms produce where MR = MC and in the long run earn only normal profit with P = MC = minimum ATC, which yields allocative and productive efficiency.
