1. Perfect Competition

2. Objectives By the end of this lesson you should be able to…
Define Perfect Competition
Explain 2 characteristics of the Perfect Competition model
Explain why, in the Perfect Competition model, P=AR=D for a firm
Explain the long run equilibrium diagram

3. Starter Mr M’s Perfectly Competitive Carrots! Round 1
Students take a carrot each for their market stall.
Teacher buys a carrot from each stall and puts them in shopping bag
Once all the carrots have been bought the teacher takes them back to the students (sellers) and asks them to take back their carrot
Students are unable to distinguish their carrots from the others
Homogenous product
Round 2
Students take a carrot each for their market stall
Teacher asks how much will you sell me you carrot for? Will only buy from cheapest provider
Having decided what he is prepared to pay the teacher will then only buy carrots that are at or below that price
Students pricing should affected by what they hear and their prices should start to converge
Illustrates perfect knowledge

4. In your notes quickly draw a spider diagram of the key characteristics of market structure

5. Market Structure characteristics Degree of power of each firm EoS
Sunk costs
Legal
Limit pricing
Anti-comp practices
Barriers to entry /
exit
Market concentration
Number of firms
Products differentiated from competition – easier to control
Perfect Knowledge – every firm has access to the same info
Market Structure
characteristics
Knowledge/ Information
Product homogeneity /
branding
Profit levels
New firms (entrants) attracted by abnormal profits

6. Market Structure More competitive (fewer imperfections) Perfect
Competition
Pure Monopoly
More competitive (fewer imperfections)

7. Less competitive (greater degree of imperfection)
Market Structure
Perfect
Competition
Pure Monopoly
Less competitive (greater degree of imperfection)

8. Monopolistic Competition
Market Structure
Pure Monopoly
Perfect
Competition
Monopolistic Competition
Oligopoly
Duopoly
Monopoly
The further right on the scale, the greater the degree of monopoly power exercised by the firm.

9. So Perfect Competition
Is a model of an extreme market structure
Which is based on certain assumptions

10. Basic Assumptions
Many small sellers each of whom produces an insignificant percentage of total market output and thus exercise no control over the market price
Many individual buyers – no control over the market price
No barriers to entry/ exit
Homogenous product – perfect substitutes. This leads to firm being passive ‘price takers’ and facing a perfectly elastic demand curve for their product.
No externalities arising from production and/or consumption which lie outside the market
Externalities – those costs or benefits which occur as a result of the main operation of a business but which ar not part of the firm’s profit and loss account. E.g. pollution and congestion – costs which are borne by the community not the business.

11. Many small firms
The firm’s demand curve is perfectly e l a s t i c because any firm that raises its prices sees demand fall to zero as consumers, with perfect knowledge, switch to other producers offering an identical product for a better price
each of whom produces an insignificant percentage of total market output and thus exercise no control over the market price
Price takers…so small and so many – individual firms cannot influence price P S P
P = D = AR D O O Q Q
Industry
Firm

12. Homogenous goods/services
Products perceived to be identical
Perfect substitutes
Consumers buy from cheapest provider
Each firm is a passive price taker
Firms face perfectly e l a s t i c demand curve for its product

13. Perfect Information
Consumers have readily available info about the market – prices and products from competing suppliers
Can access info at zero cost
Few transaction costs involved in searching for price info

14. Freedom of entry and exit
No barriers to entry /exit
No sunk costs
Entry and exit from the market feasible in the long run
If firms are making abnormal profits, new firms can easily enter the market
This assumption ensures all firm make normal profits in the long run

15. Your go…
Taking the characteristics of perfect competition insert ticks to express the degree to which each of the markets displays them…

16. Real examples of Perfect Competition – FX Market
Currency markets – taking us closer to perfect competition
Global FX markets are where all buying and selling of world currencies takes place.
24x5 trading
$4 trillion daily trade value vs New York Stock Exchange: $37bln
$4,000,000,000,000
vs.
$37,000,000,000

17. Why does a currency market come close to perfect competition?
Homogenous product – a dollar is a dollar, a pound a pound, wherever you trade it
Many buyers and sellers – all are price takers
High quality real-time info and low transaction costs
Electronic trading allows buyers and sellers to deal only with those who offer the best prices
Thomson Reuters datafeed service delivers price data from the exchange to your office in under a millisecond….1/1000th of a second!

18. Other examples Commodity markets Softs - grown
Wheat, coffee, sugar, cocoa, rice
Hards – extracted through mining
Metals
Gold
Oil

19. You will need to reproduce diagrams
In an essay or Data Response
Need to consider both the individual firm and the market (industry)
Investigate firm’s output, price, revenue and profit in both the short and the long run
Start with the long run…

20. Long run equilibrium Industry Firm MR=MC Maximum profits MC AC P S P
Before we look at the market dynamics, lets first understand what the end state looks like…
MR=MC
Maximum profits MC AC P S P
P = D = AR = MR P1 D O O Q Q1 Q
Industry
Firm

21. To recap What are the characteristics of Perfect Competition?
Do firms in perfectly competitive markets make a loss?
What would the concentration ratio be for a perfectly competitive industry?
Why is Perfect Competition rare in reality?

22. Homework...by tomorrow!
Learn the characteristics of Perfect Competition
Read article: ‘Perfect Competition’ – Does it exist, and does it matter?

23. Plenary By the end of this lesson you should be able to…
Define Perfect Competition
Explain 2 characteristics of the Perfect Competition model
Explain why, in the Perfect Competition model, P=AR=D for a firm
Explain the long run equilibrium diagram