Perfect Competition Principles of Microeconomics Boris Nikolaev.

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Presentation transcript:

Perfect Competition Principles of Microeconomics Boris Nikolaev

Introduction Firm behavior and efficiency depends on the market structure. Four market structures: (1)Perfect Competition (2)Monopoly (3)Imperfect (Monopolistic) Competition (4)Oligopoly

Perfect Competition 1.Large number of relatively small buyers and sellers. No market power. 2.Homogeneous products. 3.Easy entry and exit. 4.Perfect information of price and availability. 5.No advertising (or other forms of competition). Implications: From 1. and 2.  PC firms are PRICE TAKERS!  P = MR = AR (i.e. demand is perfectly elastic) From 3.  Efficiency in the long-run.

GOAL: max (profits) = max(TR-TC) This will happen at the point where MR= MC. Why?

Short-Run (SR) Equilibrium

Shutdown Decision (SR)

Short-Run Supply Curve

Long-Run Equilibrium

Efficiency Allocative Productive

The Supply Curve in non-competitive markets is non-existent.

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