2. Table of Contents Access Prior Knowledge New Information Set Goals
Activity
Conclusion
Spectrum of
Competition
“Perfect Competition”
Learning Targets
What Is Perfect
Competition?
Is This Perfect
Competition?
“Perfect Competition”
Learning Targets
The Two Main
Characteristics
Other
Characteristics
Short Run Industry
Supply Curve
Long Run Industry
Supply Curve

3. 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 Competitive
Least Competitive
Pass out one worksheet entitled Spectrum of Competition to each student. The directions on the slideshow are identical to the worksheet. Students will need scissors and glue to complete this activity. (If you do not have glue, you can also use tape or staples.)
See Answers

4. 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 Competitive
Least Competitive
PERFECT
COMPETITION
MONOPOLISTIC
COMPETITION
OLIGOPOLY
MONOPOLY
The focus today is just on Perfect Competition.

5. “Perfect Competition” Targets
Knowledge 1 Understand the definition and
characteristics of a market that is in perfect
competition.
Reasoning 1 Describe the difference between the short- run and long-run industry supply curves.

6. What Is Perfect Competition?
1) In perfect competition, all consumers and producers are price takers.
Consumers
Equilibrium
Price
Producers

7. What Is Perfect Competition?
1) In perfect competition, all consumers and producers are price takers.
Consumers
Equilibrium
Price
Producers
2) This means that neither consumers nor producers can do anything to change price.

8. What Is Perfect Competition?
1) In perfect competition, all consumers and producers are price takers.
Consumers
Equilibrium
Price
Producers
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.

9. What Is Perfect Competition?
1) In perfect competition, all consumers and producers are price takers.
Equilibrium
Price
Producers
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.

10. The Two Main Characteristics
There are two conditions necessary for a perfectly competitive market to exist.

11. 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.
Each apple represents one seller in the market for apples.

12. 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.

13. 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.
Notice how each apple is small. Removing one apple (seller) from the market has a negligible effect.

14. 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
Notice how all of the apples are identical. =
A) Consumers must regard all products to be identical. = =

15. 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. =

16. Other Characteristics
Although not necessary, these other characteristics are often present in perfectly competitive markets.

17. 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.

18. 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.

19. 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.
This characteristic can be confusing. Economic profit is money earned above a firm’s costs and is different from accounting profit. It seems that simply breaking even is not attractive, so why would anybody stay in this market? Remember, entrepreneurial costs are usually included in a firm’s costs. This means that the owner still gets his salary, but he does not earn anything above and beyond his market value as an owner. In the short run firms can earn these “abnormal” profits, but it will attract other firms to enter the market, reducing profit back to $0 in the long run.
3) No Long-Run Economic Profit
Any profits being earned would cause other firms to enter the market.

20. Short Run Industry Supply Curve
In the short run, the number of firms in the market is fixed.

21. 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
Tim 5 6 7 8 9
Ben
Kate
These three farmers each produce bushels of corn. Notice how each farmer has his/her own individual supply schedule.

22. 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
Tim 5 6 7 8 9
Ben
Kate
2) The sum of all individual supply curves in a market is the industry supply curve.
TOTAL 15 18 21 24 27
This final row represents the industry supply curve.
Allow students time to fill in the bottom row of the table on their note sheets.

23. 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
Tim 5 6 7 8 9
Ben
Kate
2) The sum of all individual supply curves in a market is the industry supply curve.
TOTAL 15 18 21 24 27
3) Under perfect competition, output is determined by demand and the equilibrium price. S D

24. 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
Tim 5 6 7 8 9
Ben
Kate
2) The sum of all individual supply curves in a market is the industry supply curve.
TOTAL 15 18 21 24 27
3) 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.

25. 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. D S1
This market is currently in short run equilibrium.

26. 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. S2 D S1
The new equilibrium is $3 with a quantity of 15.

27. 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. S2 D S1
The new equilibrium is $3 with a quantity of 15.

28. 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. S3
3) This will continue to happen until no firm makes a profit. D S1 S2
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.

29. 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. S3
3) This will continue to happen until no firm makes a profit. D
4) Since there is no profit, perfect competition produces the most efficient allocation of resources.
The definition of efficiency is actually when the price of the good is equal to its marginal cost. This simplified definition works well for this lesson. S1 S2
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.

30. 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.
Short Run
Supply
Long Run
2) When supply increases, output rises and price drops.
3) This will continue to happen until no firm makes a profit.
4) Since there is no profit, perfect competition produces the most efficient allocation of resources.
This is true because suppliers are much more sensitive to price in the long run than the short run. In the long run, a small rise in price will cause many firms to enter the market, and a small drop in price will cause many to exit. This entering and exiting does not happen as quickly in the short, making the supply curve more inelastic in the short run.
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.

31. Is This Perfect Competition?
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.
(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.
These are the directions for the Class Activity that is included in the download. You may differentiate instruction by using the three different versions, or you may decide to simply use just one version for the whole class.

32. “Perfect Competition” Targets
Knowledge 1 Understand the definition and
characteristics of a market that is in perfect
competition.
Reasoning 1 Describe the difference between the short- run and long-run industry supply curves.

33. Resources