In a perfectly competitive market, there are a large number of firms, both buyers and sellers are price-takers, the firms produce identical products, have perfect information, are not protected by any barriers to entry and attempt to maximize profit. The market demand curve for a perfectly competitive firm is normal, but the demand curve perceived by the firm is horizontal.
Profit is maximized when marginal cost = marginal revenue. You can determine the profit or loss that a firm makes from a graph by finding the quantity of goods produced, price per good and average total cost per good. In the long-term, firms in a perfectly competitive market can only make a normal profit, which covers their opportunity cost.
The long-run supply curve can be horizontal (in a constant cost industry), upward sloping (in an increasing cost industry) or downward sloping (in a decreasing cost industry).
Firms reach the shutdown point, where they lose less money by halting production entirely, when average variable cost equals price.
One of the main market structures you are expected to understand is the perfectly competitive market. There are six requirements that must be met to make a market perfectly competitive, as outlined below. Real-world markets for basic commodities can be fairly close to being perfectly competitive.
In a perfectly competitive market