Perfect Competition

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Perfect Competition
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Market Structure

• Market Structure describes the features of a
  market under which a firm operates, such as
• Number of firms
• Product differentiation
• Ease of entry into the market by new firms
• Form of competition Prices, advertising,
  quantity supplied, etc

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Perfectly Competitive Market Structure

• Number of firms Many sellers each with a very
  small market share. No one firm can affect the
  price.
• Product differentiation Homogenous product
• Ease of entry into the market by new firms Free
  entry and exit into the market
• Form of competition Sellers have no control
  over price.

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Perfectly Competitive Firm and Price

• Under this market structure, price is determined
  by market supply and demand.
• Firm chooses quantity that maximizes profits.
• Therefore, a perfectly competitive firm is a
  price taker.

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Perfectly CompetitiveFirms Demand Curve
Firm
Market
Price per Unit
Price per Unit
The demand curve for the firm is perfectly
elastic.
S
6
d
6
D
Quantity
100,000
Quantity
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My Friends T-Shirt Business

• Item Accounting Cost
  Economic Cost
• Wages and Salaries 40,000
  40,000
• Interest Paid
  10,000 10,000
• Depreciation (Store and equip.) 20,000
  20,000
• Taxes, insurance 20,000
  20,000
• Miscellaneous (garments, 20,000
  20,000
• transfers, acrylic paints, thread etc.)
• Implicit Wage of owner 0
  36,000
• Implicit rent
  0 40,000
• Implicit interest of owner's equity 0
  5,000
• Total cost
  110,000 191,000

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Short Run Costs and Revenues
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Total Revenue Minus Total Cost
Max. Economic Profit 36
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MC equals MR
MC
ATC
d MR
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Minimizing Short - Run Losses

• In the Short Run -
• Firms cannot leave industry.
• There are two types of costs
• Fixed
• Variable
• It can shutdown temporarily.
• How does a firm decide to shutdown in the short
  run?

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Short Run Costs and Min. Losses
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Short Run Costs and Min. Losses
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Short Run Costs and Min. Losses
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Short Run Costs and Min. Losses
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Shutting Down in the Short Run

• As long as a firm can minimize losses, it will
  continue to produce.
• If price falls below AVC, the firm will shutdown.

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Short-Run Firm Supply Curve

• A curve that indicates the quantity a firm
  supplies at each price in the short run

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Short-Run Industry Supply Curve

• A curve that indicates the quantity all firms in
  an industry supply at each price in the short run.

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Perfect Competition in the Long Run

• In the long run, all resources under firms
  control are variable.
• In the long run, firms are free to enter and
  exit markets.
• What are effects on market supply when firms
  enter or exit market?
• Long Run Average Cost Curve
• The planning curve of the firm.
• Firms can adjust scale of operation in order to
  minimize average costs of production.

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Long Run Profit

• In the long run, economic profit is zero.
• Firms continue to produce in long run even
  though economic profit is zero.
• Why?

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Long Run Adjustments to a Change in Demand

• What happens to the firms price and quantity
  combinations when there is an increase in market
  demand?
• What happens to the firms price and quantity
  combinations when there is an decrease in market
  demand?

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Perfect Competition and Efficiency

• Perfectly competitive firms are productively
  efficient.
• Perfectly competitive firms are allocatively
  efficient.
• Firms produce where their MC MB of consumer.