Cambridge International as and a level Economics Ebook

2
Explain what additional information you 
might need to be more certain of these market 
structures.
3
Discuss the extent to which similar market 
structures can be found in the public transport 
system in your own country.
an opportunity to continue producing and at least make 
normal profi t. In the long run, fi rms will only supply 
the market if they can cover all of their costs and make 
a normal profi t. Th
e minimum supply for the fi rm will 
be the optimum output where average costs are lowest. 
In perfect competition, fi rms will only make diff erent 
amounts of profi t from each other if they have diff erent 
cost structures. Th
eir behaviour is strictly limited and the 
only way to boost profi t would be to increase productivity 
and lower average total cost.
163
Chapter 7: The price system and the microeconomy 

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Quantity
0
Market price
D
S
Output
0
MC
Industry
Firm
Short-run equilibrium
Optimum
output
ATC
D
= AR = MR
Q
MC = MR
It is the existence of abnormal profit which attracts new entrants, increasing the market supply
Quantity
0
Price
D
S
Output
0
MC
Industry
Firm
Long-run equilibrium
ATC
D
1
= AR
1
= MR
1
Q
For the firm the long-run equilibrium is where MC = ATC = AR = MR
Original
New entrants
S
1
Q
Q
1
Profit max output
New
Figure 7.15 
The perfect competition model
Abnormal profi t will only be a feature of perfect 
competition in the short run. Th
is is because its 
existence will act as an incentive for the entry of new 
fi rms. Th
e absence of barriers to entry means that the 
total supply in the market will rise. Th
e eff ect of this on 
the existing fi rms is that the market price will fall and the 
abnormal profi t will diminish. When the abnormal profi t 
goes, the entry of new fi rms dries up, and the existing 
ones will simply be covering costs. It is the competitive 
force of large numbers of new entrants that destroys 
abnormal profi t.
Th
e long-run equilibrium is therefore where the only 
fi rms left are the most effi
cient ones, making a normal 
profi t. In this situation, there is no action that the fi rm 
can take to prosper at the expense of rivals. It has no 
market power. Firms’ behaviour is easy to understand. Th
e 
appeal of this model is that abnormal profi t is competed 
away and the only fi rms that participate in the market in 
the long run are productively and allocatively effi
cient. It 
is this effi
cient economic performance which occurs in 
perfect competition that can be used to criticise real-world 
market structures.