1. Pure Competition
Chapter 10
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2. Four Market Models Pure Competition (ch 10) Pure Monopoly (ch 11)
Monopolistic Competition (ch 12)
Oligopoly (ch 12)
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3. Monopolistic Competition Oligopoly Pure Monopoly
Characteristic
Pure Competition
Monopolistic Competition
Oligopoly
Pure Monopoly
# of firms
Large number
Many
Few
One
Type of Product
Standardized
Differentiated
Either
Unique no substitutes
Control over Price
None
Some
Collusion
Considerable
Conditions of Entry
Very easy
Relatively easy
Obstacles
Blocked
Nonprice competition
Advertising
Product differentiation
Public relations advertising
Examples
Agriculture
Retail
Steel, automobiles
Utilities
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4. Pure Competition Characteristics Very large numbers
Standardized product
“price takers”
Free entry & exit
Purely competitive markets have a large number of sellers acting independently. Examples of a purely competitive market include: farmers, sellers in the stock market.
Purely competitive firms produce a standardized (identical) product. As long as the price is same, consumers will be indifferent about which seller to buy the product from. Buyers view these products as perfect substitutes.
Firms in a purely competitive market have no significant control over product price. It cannot change the market price; it can only adjust to it.
Easy to enter or exit a purely competitive market. There are no significant legal, financial, or technological obstacles prohibiting a firm from entering or leaving.
Pure competition is relatively rare in the real world. Also, pure competition is a meaningful starting point for our discussion of determining output and price.
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5. Perfectly Elastic The supply curve of the firm is perfectly elastic.
Firm cannot obtain a higher price by restricting output or lowering price to increase sales volume.
Market supply is an up sloping supply curve.
Do Table 10.2 and Figure 10.1 from pages on board. Explain how price and average revenue are the same thing.
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6. Revenue Table Price Quantity TR (P * Q) MR (=price) 131 --- 1 2 262 3
--- 1 2
262 3
393 4
524 5
655 6
786 7
917 8
1048 9
1179 10
1310
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7. Maximizing Profits in Short-Run
Profit can only be maximized by adjusting their output
This can only be done by adjusting the amount of variable resources used
Purely competitive firms are “price takers.”
3. I.e. materials, labor…variable resources are adjusted to achieve the output level that maximizes its profit.
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8. How is Profit Determined?
Two Methods:
Compare total revenue & total cost
Compare marginal revenue & marginal cost
These two methods apply to all market structures…
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9. Break-Even Point - Total revenue (TR) = total cost (TC)
Profit-Maximizing Point- where profit is at its largest. This is where the difference between TR & TC is the greatest.
Complete Table 10.3 on page 183. Have students solve for: Total Cost, Total Revenue, & Profit or Loss. When finished, complete graph of Figure 10.2 on pages 184.
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10. Profit-Maximizing Table Using TR/TC Approach Price = $131
Quantity
TFC
TVC TC TR
Profit
TR-TC
100
-100 1 90
190
131
-59 2
170
270
262 -8 3
240
340
393
+53 4
300
400
524
+124 5
370
470
655
+185 6
450
550
786
+236 7
540
640
917
+277 8
650
750
1048
+298 9
780
880
1179
+299 10
930
1030
1310
+280
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11. MR=MC Rule
Profits can be maximized or losses can be minimized by producing at the output at which marginal revenue equals marginal cost.
Complete 10.4 on page 185. Solve for ATC, MC, Price=Marginal Rev, & Total Economic Profit or Loss. When finished, both tables 10.3 & 10.4 should have the same profit maximizing output (9 units). Also, complete the graph of the data from Key Graph 10.3 on page 187.
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12. Profit-Maximizing Table Using MR/MC Approach Price = $131Q TC TR MC MR
100
--- 1
190
131 2
270
262 3
340
393 4
400
524 5
470
655 6
550
786 7
640
917 8
750
1048 9
880
1179 10
1030
1310
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13. Shutdown Case
If price falls below the minimum average variable cost, the firm will minimize its losses in the short run by shutting down.
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14. Short-Run Supply
The portion of the firm’s marginal-cost curve lying above its average-variable cost curve is its short-run supply curve.
Solid segment of the mc curve is the firm’s short-run supply curve.
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15. Long-Run
The long-run supply curve for a constant-cost industry is horizontal.
The long-run supply curve for an increasing-cost industry is up sloping.
Entry or exit of firms does not affect prices. An increase in demand increases output.
Entry of new firms in response to an increase in demand will bid up the price.
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16. Decreasing Cost Industry
Firms experience lower costs as the industry expands.
Lower production costs reduces price to the consumer and helps firms achieve economies of scale.
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17. Productive & Allocative Efficiency
Productive -Requires that goods be produced in the least costly way.
Allocative - Resources are used by firms in a way that will yield the mix of products that is most wanted by society.
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