Pure Competition

1
Pure Competition
2
FOUR MARKET MODELS
Pure Competition

• Very Large Numbers
• Standardized Product
• Price Takers
• Free Entry and Exit

Pure Monopoly
Pure Competition
Monopolistic Competition
Oligopoly
Market Structure Continuum
3
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
Perfectly Elastic Demand
Price Taker Role
Total Revenue
Average Revenue
Marginal Revenue
For example...
4
SHORT RUN PROFIT MAXIMIZATION
...
MR MC Rule

• Three Characteristics of MRMC Rule
• The rule applies only if producing is preferred
  to shutting down
• Rule applies to all markets
• Rule can be restated PMC

5
MARGINAL REVENUE-MARGINAL COST APPROACH
Profit Maximization Position
200 150 100 50 0
Economic Profit
MC
MR
131.00
ATC
Cost and Revenue
AVC
97.78
1 2 3 4 5 6 7 8 9 10
6
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position
200 150 100 50 0
Economic Loss
MC
ATC
Cost and Revenue
AVC
91.67
MR
81.00
1 2 3 4 5 6 7 8 9 10
7
MARGINAL REVENUE-MARGINAL COST APPROACH
Short-Run Shut Down Point
200 150 100 50 0
MC
ATC
Cost and Revenue
AVC
MR
71.00
Minimum AVC is the Shut-Down Point
1 2 3 4 5 6 7 8 9 10
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MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost Short-Run Supply
Break-even (Normal Profit) Point
MC
MR5
P5
ATC
MR4
P4
Cost and Revenue, (dollars)
AVC
MR3
P3
MR2
P2
MR1
P1
Do not Produce Below AVC
Q2
Q3
Q4
Q5
Quantity Supplied
9
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost Short-Run Supply
Yields the Short-Run Supply Curve
Supply
MC
MR5
P5
MR4
P4
Cost and Revenue, (dollars)
MR3
P3
MR2
P2
MR1
P1
No Production Below AVC
Q2
Q3
Q4
Q5
Quantity Supplied
10
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm Takes its Price from the
Industry Equilibrium
S ??MCs
P
P
Economic Profit
ATC
SMC
D
111
111
AVC
D
Q
Q
8
8000
Firm (price taker)
Industry