The formal diagrammatic analysis of the perfectly competitive model in the short and long run
Economists use two linked diagrams to show how a perfectly competitive firm behaves. One diagram shows the whole market setting the price. The other shows a single firm deciding how much to produce.
Formula
Supernormal profit = (AR − AC) × Q
Real World
The UK wheat market approximates the perfectly competitive model — individual arable farmers are price takers, and when high grain prices attract new entrants, supply rises until profit is competed away.
Exam Focus
Draw both panels side by side; examiners expect the industry price to be shown transferring across as the firm's horizontal AR=MR line.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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