1 / 22

Perfect Competition

Perfect Competition. Chapter 9 ECO 2023 Fall 2007. Market Structure. Describes the important feature of a market such as Number of suppliers Product’s degree of uniformity Ease of entry into the market Forms of competition among firms

blenda
Download Presentation

Perfect Competition

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Perfect Competition Chapter 9 ECO 2023 Fall 2007

  2. Market Structure • Describes the important feature of a market such as • Number of suppliers • Product’s degree of uniformity • Ease of entry into the market • Forms of competition among firms • A firm’s decisions about how much to produce or what price to charge depend on the structure of the market

  3. Market Models • Pure Competition • Pure Monopoly • Monopolistic Competition • Oligopoly

  4. Perfect Competitive Market • A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run

  5. Characteristics • Many independent buyers and sellers • Buyers are small relative to the market • Standardized product – homogeneous • Price takers – individual firms exert no significant control over product price. • Free entry and exit into the industry

  6. Perfectly Competitive Market • Demand under Perfect Competition • Firm’s demand is perfectly elastic therefore the demand curve is horizontal • PRICE TAKER • One and only price exists in the market and it is equilibrium price P D Q

  7. Average Revenue • The firm’s demand schedule is also its average revenue schedule • Price per unit to purchaser is also revenue per unit or average revenue

  8. Total Revenue • P X Q • Since price is constant, increase in sales of one unit leads to increase in total revenue = to price. • Each unit sold adds exactly its constant price to total revenue

  9. Marginal Revenue • Is the change in total revenue that results from selling 1 more unit of output • This is the selling price since it is constant • Therefore: MR = AR = Price

  10. Short Run Profit Maximization • Each firms tries to maximize economic profit • Short run – it has a fixed plant • Therefore output is changed through changes in variable inputs. • It adjusts its variable resources to achieve the output level that maximizes its profit. • Two ways to determine level of output at which a competitive firm will realize maximum profit or minimum loss • Compare total revenue to total cost • Compare marginal revenue to marginal cost • Both apply to all firms • Firms that ignore this strategy do not survive

  11. Example

  12. Graphically Total Revenue Maximum Economic Profit Total Revenue & Total Cost Total Cost Quantity Demanded 9

  13. Marginal Revenue Equals Marginal Cost • Marginal revenue • The change in total revenue from selling an additional unit • In perfect competition, marginal revenue is equal to the market price • The firm will increase production as long as each additional units adds more to total revenue than to cost • As long as marginal revenue exceeds marginal cost

  14. Graphically

  15. Golden Rule of Profit Maximization MR = MC

  16. Price MC ATC $5 Demand = Marginal Revenue = Price = Average Revenue Profit $4 12 Quantity Perfectly Competitive Market • Short run economic profit Profit

  17. Perfectly Competitive Market • Minimizing Short-Run Losses • An individual firm in perfect competition has no control over the market price • Price may be so low that a firm loses money no matter how much it produces • Can either produce at a loss • Temporarily shut down • Short run • A period too short to allow existing firms to leave the industry

  18. Perfectly Competitive Market • Decision in the short run • Continue to produce • A firm will produce if • TOTAL REVENUE > VARIABLE COST • Shut down • A firm will shut down • TOTAL REVENUE < VARIABLE COST

  19. Price MC ATC $5 Loss Demand = Marginal Revenue = Price = Average Revenue $4 12 Quantity Perfectly Competitive Market • Short run Losses Loss

  20. Perfectly Competitive Market • Perfect Competition in the Long Run • If short run has ECONOMIC PROFIT • Firms enter the industry • Increase in supply • Price drops • Continues until NO ECONOMIC PROFIT in the long run • Price = Marginal Cost = Average Total Cost

  21. Perfectly Competitive Market • Perfect Competition in the Long Run • If short run has ECONOMIC Loss • Firms leavethe industry • Decrease in supply • Price rises • Continues until NO ECONOMIC PROFIT in the long run • Price = Marginal Cost = Average Total Cost

  22. Perfectly Competitive Market • Productive efficiency • The condition that exists when market output is produced using the least cost combination of inputs • Minimum average cost in the long run • Allocative efficiency • The condition that exists when firms produce the output most preferred by consumers • Marginal benefits = marginal cost

More Related