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A-Level Economics · Perfect competition (short-run profit) diagram question

EVALUATION: what does perfect competition fail to deliver once profit has been competed away?

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The answer

Dynamic efficiency — no supernormal profit to reinvest AND no reward for risk, so no innovation and no long-run fall in costs. Two prongs, both worth marks: firms are too poor to invest, and they have no incentive to, because they expect no economic profit anyway. In the long run the model is allocatively and productively efficient — say so, or you lose marks. The evaluation is DYNAMIC efficiency, and it has two prongs: there is no supernormal profit left to reinvest, and there is no reward for risk-taking, because any gain is competed away. So no new products and no falling costs over time. The counter-argument: fierce competition may FORCE firms to invest anyway just to survive.

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This is one of 6 questions on the perfect competition (short-run profit) diagram — every corner lettered, every wrong answer diagnosed.

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