PERFECT COMPETITION:

The perfectly competitive market is characterised by the presence of many buyers and many sellers with both the parties being mere price takers, presence of perfect knowledge, homogeneous product and free entry and exit from the market.

Under such of a setting a firm faces a horizontal demand curve and decides to sell whatever it can at the given market price. Being a profit maximiser, the firm in the short-run, chooses to sell that amount of output for which the p = MC. As long as p> min AVC, the firm earns supernormal profit by producing and selling in the market.

In the long-run due to free entry and exit from the market, the long-run equilibrium for the firm occurs at the minimum point of LAC, whereby p= min LAC and thereby the supernormal profits are swept out. In the long-run, therefore, the firms just break even due to the phenomenon of free entry and exit from the market.