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Pure Competition

Pure Competition. Mr. Bammel. Pure Competition Characteristics. Very Large Numbers : independently acting sellers often at national levels of market; Standardized Product : Identical (consumers are indifferent to who they buy from)

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Pure Competition

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  1. Pure Competition Mr. Bammel

  2. Pure Competition Characteristics • Very Large Numbers: independently acting sellers often at national levels of market; • Standardized Product: Identical (consumers are indifferent to who they buy from) • “Price Takers:” sellers have NO control over the price (no seller can change price, will result in shrinking profits) • Free Entry and Exit: no legal, technological or financial obstacles exist;

  3. Demand of a Purely Competitive Seller • Seller must accept price determined by the market; • So, for an individual firm, the demand schedule will be perfectly elastic along the market price; • The firm cannot increase or decrease price: • Increase will drive buyers away • Decrease will not make more of profit

  4. Revenue in Pure Competition • Average Revenue (per unit) will be Price received by the seller for the product; • Marginal Revenue is the extra revenue brought in from each successive unit, so basically it will be the same as the price as well. • Total Revenue will be equal to your price times your quantity the firm can sell. • In pure competition, P = AR = MR;

  5. Purely competitive Firm’s Demand and Revenue Curves

  6. Profit Maximization: Total Revenue vs. Total Cost • A firm will maximize profits comparing TR to TC by finding the gap between the two which will be the greatest;

  7. Profit Maximization: Marginal Revenue vs. Marginal Cost • As long as MR > MC, produce (will be making a profit); • When MC > MR, do not produce (now, losing profits); • In the short run, the firm will maximize profit or minimize loss by producing the output at which marginal revenue equals marginal cost (as long as producing is preferable to shutting down); • If it is a fraction (which it usually is), then produce last complete unit; • Can be restated as P = MC when applied to purely competitive firms;

  8. Groups • Each of you will be placed in a group in order to examine one of the graphs associated with Pure competition. Your group will be responsible for drawing a large version of the graph and then examining and explaining the components to the rest of the class. Be sure to use all crucial information when creating your graph (don’t just copy the graph and be done…you need more). • Your paper/graph should be well enough organized for someone to be able to understand all important components based off of it. • Graphs: • Short-run profit-maximizing in a purely competitive market • Short-run loss-minimizing position in a purely competitive market • Short-run shutdown position in a purely competitive market • Short-run supply curve in a purely competitive market

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