Question

Explain in 160 words the pure competition in short run

Answer 1

Pure/perfect competition is a situation where there are large number of buyers and sellers selling homogeneous products in an economy, with freedom to entry and exit. As a result of large number of firms, each individual firm is small enough to have a say in the market for price determination. Thus, the industry is the price maker and firms are price takers.

Free entry and exit of firms lead to the firms earning abnormal profits in the long run. However, in the short run, a firm may incur abnormal losses or earn abnormal profits.

For example. If a firm is earning abnormal profit in the short run, many firms will enter the industry seeing these profits. As a result, supply will increase resulting in a fall in price and profits. Similarly, firms incurring abnormal losses may exit the industry in the short rum resulting in a decrrase in supply, an increase in price and also profits.