Pure Competition

 Identical product  As long as the price is the same, buyers don’t care which supplier they buy from--- perfect substitutes  Ex- Agricultural products (rice and corn)

 Product that differs slightly from competitors’ versions--- preferences exist  Buyers are not indifferent about the seller when the price of the product is the same  Ex- Shoes, dresses, retail

 Economists group industries into 4 distinct market structures  1. Pure Monopoly  2. Oligopoly  3. Monopolistic Competition  4. Pure Competition

 A market structure in which one firm is the sole seller of a product or service  Entry of additional firms is blocked so one firm makes up the entire industry  They make no effort to differentiate its product  Ex- local utilities- no substitutes

 Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors  EX- Water company, electric company, telephone (too expensive to build the networks for competitors)

 Involves only a few sellers of a standardized (identical to competitors) or differentiated product  Each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output  Ex- Steel, automobiles, household appliances

Relatively large number of sellers producing differentiated products (clothing, furniture, books) Wide-spread non-price competition (product differentiation), a selling strategy in which one firm tries to distinguish its products or service from competitors on the basis of attributes such as design and craftsmanship Ex- Retail stores, shoes

 Very large number of firms producing a standardized product (corn)  “Price Takers”- individual firms cannot change the market price, only react to changes  Individuals are at the mercy of the market  Ex- if market price is $2 why sell at $2.05 or $1.95?

 Combination of Pure Monopoly, Monopolistic Competition, and Oligopoly  3 grouped together are distinguished from Pure Competition

 Demand schedule for individual firm in a purely competitive industry is perfectly elastic at the market price (only 1 price available)  The firm cannot obtain a higher price by restricting output, nor should it lower prices to increase volume

 Marginal Revenue, Demand, Average Revenue, and Price, are the same (MR. DARP)  Total revenue increases by a constant (price)  Total revenue curve is upward sloping with constant slope

Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data Pure Competition Price and Revenue $1179 Quantity Demanded (Sold) MR = D = AR = P TR PQDQD MR $ $ $ ] ] ] ] ] ] ] ] ] ]