group report. perfect competition

7/30/2019 Group Report. Perfect Competition

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It identifies how a market is made up in terms of:

Number of firms in the industry The nature of the product produced

The degree to which the firm can influence price

Profit levels

Firms behaviour pricing strategies, non-pricecompetition, output levels

The extent of barriers to entry

The impact on efficiency


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MARKET STRUCTURE

It is represented by four (4) basic marketmodels

Each market model has a set ofcharacteristics which distinguished it fromother market models.


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MARKET STRUCTURE

Characteristics: Look at these everyday products what type of

market structure are the producers of these products operating in?

Remember tothink about thenature of theproduct, entry andexit, behaviour ofthe firms, numberand size of thefirms in theindustry.

You might evenhave to ask whatthe industry is??

Bananas

Vodka

Mercedes CLK Coupe

Canon SLR Camera

ElectricGuitarJazz Body


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MARKET STRUCTURE MODELS

PERFECT/PURE TYPEIMPERFECT / NON-PURE

TYPE

PURE MONOPOLY

MONOPOLISTIC

COMPETITION

OLIGOPOLY

PERFECT/PURE

COMPETITION

PERFECT

COMPETITION


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Competition as a process is a rivalryamong firms.

Competition as the perfectly competitivemarket structure.


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Large number of firms

Products are homogenous (identical)

There are no barriers to entry and exit offirms in the long run

Zero Transaction Costs


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Both buyers and sellers are price takershave no control over the price theycharge for their product

Firms are profit maximizers

Consumers and producers have perfectknowledge about the market

No externalities in production andconsumption


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It is the ability of a firm to profitably raisethe market price of a good or service overmarginal cost.

In Perfectly competitive markets, marketparticipants have no market power.

A firm with market power can raise priceswithout losing its customers tocompetitors.


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Market participants that have marketpower are therefore sometimes referred toas price makers, while those withoutare sometimes called price takers.

Significant market power is when pricesexceed marginal cost and long runaverage cost, so the firm makeseconomic profits.


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FOREIGN

EXCHANGE DEALING

& STOCK MARKET

Homogeneous product - US dollar or theEuro

Many buyers and sellers

Usually each trader is small relative to total

market and has to take price as given

Sometimes, traders can move currencymarkets


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PIG, FARMING, CATTLE

WHOLESALE MARKETS

FOR FRESH VEGETABLES, FISHAND FLOWERS

FARMERS MARKET FOR

RICE, CORN, SUGAR, APPL

TOMATOES AND ETC.


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A perfectly competitive firms demand schedule isperfectly elastic even though the demand curvefor the market is downward sloping.

This means that firms will increase their output inresponse to an increase in demand even thoughthat will cause the price to fall thus making allfirms collectively worse off.


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Market supply

Marketdemand1,000 3,000

Price

$108

6

42

0Quantity

Market Firm

Individual firmdemand

MARKET DEMAND VERSUS

INDIVIDUAL FIRM DEMAND CURVE

10 20 30

Price

$108

6

42

0Quantity


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The goal of the firm is to maximize profit.

When it decides what quantity to produce itcontinually asks how changes in quantity affect

profit. A firm maximizes profit when MC= MR.


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Marginal revenue (MR) the change in totalrevenue associated with a change inquantity.

Marginal cost (MC) -- the change in total costassociated with a change in quantity.


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Since a perfectcompetitor accepts themarket price as given, forcompetitive firm, marginalrevenue is price (MR=P)

Initially, marginal costfalls and then begins torise. Margin concepts arebest defined between thenumbers.

HOW TO MAXIMIZE PROFITS.?

MARGINALCOST MARGINALREVENUE


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HOW TO MAXIMIZE PROFITS.?

THE SUPPLIER WILL CONTINUE TO PRODUCE AS

LONG AS MARGINAL COST IS LESS THAN MARGINAL

REVENUE.

The supplier will cut back on production ifmarginal cost is greater than marginal revenue.MC MR P


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C

A

P = D = MR

Costs

1 2 3 4 5 6 7 8 9 10 Quantity

60

5040

30

20

10

0

A

B

MC

0123456

789

10

$28.00

20.0016.0014.0012.0017.00

22.0030.0040.0054.0068.00

Price = MR QuantityProduced

MarginalCost

$35.0035.0035.0035.0035.0035.0035.00

35.0035.0035.0035.00


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THE MARGINAL COST CURVE IS THE FIRMS

SUPPLY CURVE

A

B

CMarginal cost

Cost,Price

$70

60

50

40

30

20

10

0 1 Quantity2 3 4 5 6 7 8 9 10


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FIRMS MAXIMIZE TOTAL PROFIT

When we speak of maximizing profit, werefer to maximizing total profit, not profitper unit.

Firms do not care about profit per unit; aslong as an increase in output will increasetotal profits, a profit-maximizing firm should

increase output.


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Profit is maximized where the verticaldistance between total revenue and total costis greatest.

At that output, MR (the slope of the totalrevenue curve) and MC (the slope of the totalcost curve) are equal.


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TC TR

0

Totalcost,reve

nue

$385350

315280245210175140105

7035

Quantity1 2 3 4 5 6 7 8 9

PROFIT DETERMINATION USING TOTAL COST

AND REVENUE CURVES

Maximum profit =$81

$130

Loss

Loss

Profit


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MC

P = MR

2 4 6 8 Quantity

Price

60

50

40

30

20

10

0

ATC

AVC

Loss

A$17.80

THE SHUTDOWN DECISION


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SHORT RUN MARKET SUPPLY AND DEMAND

In the short run when the number of firms in themarket is fixed, the market supply curve is just thehorizontal sum of all the firms' marginal cost curves,taking account of any changes in input prices thatmight occur.

While the firm's demand curve is perfectly elastic, the

industry's is downward sloping.

For the industry's supply curve we use a marketsupply curve.


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Profits and losses are inconsistent with long-run

equilibrium. Profits create incentives for new firms to enter, output

will increase, and the price will fall until zero profits aremade.

Zero profit condition is the requirement that in the longrun zero profits exist.

The zero profit condition defines the long-runequilibrium of a competitive industry.


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In the short run, the price does more of theadjusting.

In the long run, more of the adjustment is done byquantity.


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Two other possibilities exist:

Increasing-cost industry factor prices riseas new firms enter the market and existingfirms expand capacity.

Decreasing-cost industry factor pricesfall as industry output expands.


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group report. perfect competition

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