Market%20Structure:%20Perfect%20Competition - PowerPoint PPT Presentation

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Market%20Structure:%20Perfect%20Competition

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Local retail apparel. Contract construction. What's So Perfect about Perfect Competition? ... Decreasing-cost industry. Theory of Contestable Markets ... – PowerPoint PPT presentation

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Title: Market%20Structure:%20Perfect%20Competition


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
Whats 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
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8
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9
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

10
Theory of Contestable Markets
  • Generally speaking, actual number of firms
    important
  • Potential entry may be more important
  • Actual number of firms may not matter

11
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

12
Short-Run Equilibrium
  • MR MC
  • P gt MC gt ATC
  • Profit gt 0
  • Graphical example

13
Long-Run Equilibrium
  • Profit attracts rival firms
  • Demand falls or prices rise to meet challenge
  • P ATC, but still gt MC
  • Excess capacity
  • Graphical example

14
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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