1. Perfect Competition
Chapter 14

2. Market Structures
Market Structure is the way an industry is organized:
Auto Industry versus Restaurant Industry

3. 4 Market Structures “I hate Monopolies”
Perfect Competition is only an economic theory/model.
It does not exist in the “real” world
It would be Adam Smith’s dream!
Perfect
Competition
Monopolistic
Competition
Monopoly
Oligopoly
Most competitive
Least competitive

4. All firms can earn economic profit in the short run
All firms maximize profit when MR = MC
Some firms must earn zero economic profit in long run
Costs
$3.00
2.50 MC
ATC
AVC
AFC
2.00
1.50
1.00
0.50 2 4 6 8 10 12 14
Quantity of Output

5. Market Characteristics
4 market characteristics of an industry determine the pricing power of a business
5 market characteristics:
# of Firms
Type of Product
Ease of entering or exiting industry
Amount of Information
Degree of Price Control
Determine
degree of price
control

6. Perfect Competition Characteristics
Many small Firms
Homogenous products
Complete freedom to enter or exit industry
No cost, immediate action
Perfect information
Price Taker:
No price control—sell at Market Price

7. Perfect Competition in “Action”
All firms are small & can quickly enter/exit industry
No costs, immediate action
The actions of any single buyer/seller have a negligible impact on market price
Each buyer & seller takes current market price of output (price taker)
Competitive firms move to any industry with more economic profit
short run: Firms can earn profit by setting MR = MC
long run: All firms must earn zero economic profit (MR=MC)
Market is naturally “self-regulating”
Excess profit cannot last => new firms enter market => price falls!

8. Perfect Competition Equilibrium
Entire Industry
Individual Firm
T-Shirts
T-Shirts
Price S1
Price MC
P = MR
$10 E1
$10 D1 Q1 E1 D1 Q1
Qty
Qty
Individual firms can sell all their production at current Market Price

9. Revenue of a Competitive Firm
In Perfect Competition P = AR = MR
Average Revenue (AR =TR/Q)
Marginal Revenue (MR =TR/Q)

10. Worksheet

11. Zero Economic Profit Does not mean zero accounting profit
Means you earn a “normal” economic profit
Also includes all Implicit Costs
Such as the Opportunity Cost of working
Profits can not stay above zero in a competitive market
In long run profits are pushed to zero

12. Perfect Competition in Action
In perfect competition, new firms will enter the market as long as there is excess profit
When profits are less than zero—firms exit the market
Benefits of Perfect Competition
Prices remain low & profits are pushed to zero
inefficient producers are forced to leave
Perfectly “self regulating” system

13. Competitive Market Entire Industry Individual Firm S1 MC
T-Shirts
T-Shirts
Price S1
Price MC
$15 E1
$15
D1 = MR E1 D1 Q1
Qty Q1
Qty

14. Market Characteristics
Perfect
Competition
# Sellers
Type of Product
Ease of Entry/Exit
Information
Price Control

15. Perfect Competition Video