Begin End ShowTable of Contents Market Structure (4.1.2) Copyright © 2013 N.S.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Table of Contents Spectrum of Competition “Perfect Competition” Learning Targets “Perfect Competition” Learning Targets What Is Perfect Competition? Is This Perfect Competition? The Two Main Characteristics Other Characteristics Short Run Industry Supply Curve Long Run Industry Supply Curve Access Prior Knowledge Set Goals New Information Activity Conclusion

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Spectrum of Competition Directions: 1) Cut this sheet in half on the dotted line. 2) On the bottom, write whatever information you know about each market. 3) Cut out the different markets from the bottom portion on the dotted lines. 4) Glue these markets into the empty box on the top portion. Glue them in order from the “Most Competitive” market to the “Least Competitive” market. Most CompetitiveLeast Competitive See Answers

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Spectrum of Competition Directions: 1) Cut this sheet in half on the dotted line. 2) On the bottom, write whatever information you know about each market. 3) Cut out the different markets from the bottom portion on the dotted lines. 4) Glue these markets into the empty box on the top portion. Glue them in order from the “Most Competitive” market to the “Least Competitive” market. Most CompetitiveLeast Competitive PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLYMONOPOLY The focus today is just on Perfect Competition.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. “Perfect Competition” Targets Knowledge 1Understand the definition and characteristics of a market that is in perfect competition. Reasoning 1Describe the difference between the short- run and long-run industry supply curves.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. ProducersConsumers Equilibrium Price

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. ProducersConsumers Equilibrium Price 2) This means that neither consumers nor producers can do anything to change price.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. Producers Consumers Equilibrium Price 2) This means that neither consumers nor producers can do anything to change price. 3) Consumers rarely affect price, so we will focus on the producer.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. Producers Equilibrium Price 2) This means that neither consumers nor producers can do anything to change price. 3) Consumers rarely affect price, so we will focus on the producer. 4) The supply and demand model is a model of a perfectly competitive market.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share. C) This means no seller can produce more than a small fraction of the total market supply.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share. C) This means no seller can produce more than a small fraction of the total market supply. 2) Standardized Product A) Consumers must regard all products to be identical. ===== ===== ===== ===== ===== ==== ==== ==== ====

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share. C) This means no seller can produce more than a small fraction of the total market supply. 2) Standardized Product A) Consumers must regard all products to be identical. ===== ===== ===== ===== ===== ==== ==== ==== ==== B) They do not have to be identical, consumers just have to think they are.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets. 1) Free Entry and Exit It must be easy for new firms to open a new business in the market.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets. 1) Free Entry and Exit It must be easy for new firms to open a new business in the market. 2) Perfect Information Firms and consumers have complete information about price, quality, and production methods.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets. 1) Free Entry and Exit It must be easy for new firms to open a new business in the market. 2) Perfect Information Firms and consumers have complete information about price, quality, and production methods. 3) No Long-Run Economic Profit Any profits being earned would cause other firms to enter the market.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. Name$1$2$3$4$5 Tim56789 Ben56789 Kate56789 These three farmers each produce bushels of corn. Notice how each farmer has his/her own individual supply schedule.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. Name$1$2$3$4$5 Tim56789 Ben56789 Kate56789 This final row represents the industry supply curve. 2) The sum of all individual supply curves in a market is the industry supply curve. TOTAL

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. Name$1$2$3$4$5 Tim56789 Ben56789 Kate ) The sum of all individual supply curves in a market is the industry supply curve. TOTAL ) Under perfect competition, output is determined by demand and the equilibrium price. S D

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. Name$1$2$3$4$5 Tim56789 Ben56789 Kate ) The sum of all individual supply curves in a market is the industry supply curve. TOTAL ) Under perfect competition, output is determined by demand and the equilibrium price. S D 4) Because the number of firms is fixed, profit can be made in the short run.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Long Run Industry Supply Curve Let’s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. This market is currently in short run equilibrium. D S1S1

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Long Run Industry Supply Curve Let’s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. D S1S1 S2S2 The new equilibrium is $3 with a quantity of 15.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Long Run Industry Supply Curve Let’s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. D S1S1 S2S2 The new equilibrium is $3 with a quantity of 15. 2) When supply increases, output rises and price drops.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Long Run Industry Supply Curve Let’s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. D S1S1 S2S2 In this market, if $2 is the break even price, no more firms will enter because profit is now $0. The market is now in long run equilibrium. 2) When supply increases, output rises and price drops. 3) This will continue to happen until no firm makes a profit. S3S3

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Long Run Industry Supply Curve Let’s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. D S1S1 S2S2 In this market, if $2 is the break even price, no more firms will enter because profit is now $0. The market is now in long run equilibrium. 2) When supply increases, output rises and price drops. 3) This will continue to happen until no firm makes a profit. S3S3 4) Since there is no profit, perfect competition produces the most efficient allocation of resources.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Long Run Industry Supply Curve Let’s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. 2) When supply increases, output rises and price drops. 3) This will continue to happen until no firm makes a profit. 5) The long run industry supply curve is always flatter (more elastic) than the short run. The LRS is always flatter than the SRS because firms are able to freely enter and exit the market in the long run. Short Run Supply Long Run Supply 4) Since there is no profit, perfect competition produces the most efficient allocation of resources.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Is This Perfect Competition? (a)Complete this version if you feel you need the teacher to work with you on this topic. (b)Complete this version if you feel you have a fairly good understanding of this topic. (c)Complete this version if you feel this topic is easy. DIRECTIONS Several markets are listed below. Use the characteristics of perfect competition to decide whether each market is perfectly competitive or not. There are questions for each characteristic of perfect competition for each market.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. “Perfect Competition” Targets Knowledge 1Understand the definition and characteristics of a market that is in perfect competition. Reasoning 1Describe the difference between the short- run and long-run industry supply curves.

Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Resources