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Market Structure: Perfect Competition

Market Structure: Perfect Competition. Why study perfect competition? Standard for comparison More prevalent than you might think. Analyzing Market Structure. What is the profit-maximizing output level? What is the profit-maximizing price?

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Market Structure: Perfect Competition

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  1. Market Structure: Perfect Competition • Why study perfect competition? • Standard for comparison • More prevalent than you might think

  2. Analyzing Market Structure • What is the profit-maximizing output level? • What is the profit-maximizing price? • What role does cost play in determining output and price?

  3. Characteristics of a Market • Number of buyers and sellers • Nature of the product • Degree of information available • Barriers to entry and exit

  4. Perfect Competition: Price Takers • Agriculture • Farming • Cattle ranching • Long-haul trucking • Local retail apparel • Contract construction

  5. What’s So Perfect about Perfect Competition? • Short-run resource allocation • Mutually beneficial transactions • Consumer surplus • Long-run efficiency • Produce at minimum LAC

  6. Short-Run Equilibrium in Perfect Competition • Graphical representation • Profit maximization • Short-run supply curve • Mathematical model • TR - TC approach • MR = MC approach • Marginal profit = 0 approach

  7. Long-Run Equilibrium in Perfect Competition • LRAC and LRMC • Equilibrium at minimum LRAC • Long-run industry supply curves • Constant-cost industry • Increasing-cost industry • Decreasing-cost industry

  8. Theory of Contestable Markets • Generally speaking, actual number of firms important • Potential entry may be more important • Actual number of firms may not matter

  9. Characteristics of Monopolistic Competition • Many independently acting firms. No collusion • Products are close, but not perfect, substitutes • No barriers to entry or exit • Imperfect information, bringing out the possibility of advertising

  10. Short-Run Equilibrium • MR = MC • P > MC > ATC • Profit > 0 • Graphical example

  11. Long-Run Equilibrium • Profit attracts rival firms • Demand falls or prices rise to meet challenge • P = ATC, but still > MC • Excess capacity • Graphical example

  12. Monopolistic Competition and Perfect Competition: A Comparison • LR equilibriums • Monopolistic competition • Inefficient, excess capacity • Too many firms, too many brands • Too much selling expense • Spurious product differentiation

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