Perfect Competition

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Perfect Competition
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Perfect Competition
Monopoly
Market Structures
Imperfect Competition
Oligopoly
Price Discrimination
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Objective of firms ??

• Maximise Profits
• Minimise Profits
• Maximise Losses

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Firms maximise profits when ??

• MC gt MR
• MC lt MR
• MC MR
• provide MC gt MR at all quantities after that

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Firms in Perfect Competition are??

• Price givers
• Price takers

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Price taker means ??

• The firm sets the price
• The industry sets the price

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Industry
Firm
S
Price
Price
P1
P1
AR
Q
Q1
Quantity
Quantity
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Eg. of Perfect Competition
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Assumptions for Perfect Competition (P 95/96)

• Many small firms in the industry
• 2) Many buyers in the industry
• 3) Firms aim to maximise profits

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• 4) Freedom of entry into exit from the
  industry
• 5) Widespread knowledge of profit earned
• 6) Products are homogeneous

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• 7) Perfect elasticity of the factors of
  production
• 8) Firms produce on the lowest point on the
  Average Cost Curve.

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Advantages of Perfect Competition

• Low prices
• No waste/efficiency
• Guaranteed same quality from all suppliers _at_ the
  same price

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Disadvantages

• No Choice
• No economies of scale
• Do not benefit form lower unit costs as
  production increases.

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Explanation

• In the short run firms in perfect competition
  earn super normal profits as AR gt AC.
• Because there is full knowledge of profits other
  firms will enter the market.
• This causes the supply curve to shift to the
  right.
• This causes the price to fall.
• This will cause the demand/AR to move down.

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Continued

• This eliminates (gets rid of) SNP in the long
  run.
• Perfect competition is as very efficient because
• Firm produce at the lowest point of average cost
  curve point A.
• Therefore firm do not waste any scarce resources.