Final answer:
A perfectly competitive market features many buyers and sellers, homogenous products, and free market entry and exit, which leads to firms earning zero economic profits in the long run. In contrast, markets with imperfect competition allow firms to enjoy short-run profits due to factors like brand differentiation or barriers to entry. These profits are represented graphically by the area where the market price exceeds average costs.
Step-by-step explanation:
A perfectly competitive market is characterized by many buyers and sellers, homogeneous products, free entry and exit into the market, and perfect information among participants. In the long run equilibrium, firms in a perfectly competitive market produce at the output level where price (P) equals marginal revenue (MR), equals marginal cost (MC), and equals average cost (AC), hence earning zero economic profits.
In the short run, a perfectly competitive firm may earn profits if the market price rises due to, for example, increased demand. However, these profits will attract new firms to enter the market, increasing supply and driving the price down until the firms earn zero economic profits again, reaching a new long-run equilibrium.
Conversely, in an imperfect competition (IPC) market, firms have some control over prices due to factors such as brand differentiation, barriers to entry, or fewer participants. In the short run equilibrium with profits, firms may be able to earn above-normal profits due to these barriers, which are represented on a graph by the area where price is above the average cost curve.