1. Perfect Competition 3

2. Starter - Coal Read article on Coal Industry
Which characteristics of perfect competition does the coal market have?
Which characteristics does it not meet?

3. Quick questions….
Which characteristics of perfect competition does the coal market have?
Which characteristics does it not meet?
If facing a loss, a PC firm might prefer to leave the market than take the losses!
Which characteristics of perfect competition does the coal market have?
Homogenous product albeit different grades
Perfect knowledge with easy access o mining technology and price info.
Large number of potential buyers in the world marketplace
Plenty of alternative suppliers from other countries
Easy substitutes – oil and gas
Which characteristics does it not meet?
If facing a loss, a PC firm might prefer to leave the market than take the losses!

4. Lesson objectives
Analyse diagrammatically the behaviour of firms in a PC market structure
Recap on how to answer questions and recognising trigger words
Investigate firms’ costs under perfect competition
Explain the meaning and implication of shut down point

5. No peeking…
Draw the long run output diagram for a firm operating in a perfectly competitive environment
I’ll start you off…

6. 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

7. 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

8. Any profit in excess of that amount is termed Abnormal or Supernormal
Normal profits – that level of profits which is just sufficient to keep resources employed in making a particular product from being used for some other purpose.
Any profit in excess of that amount is termed Abnormal or Supernormal
Recap
What does earning ‘normal profit’ mean?
What will the concentration ratio be for firms operating in perfect competition?
Do firms in perfectly competitive markets make a loss?
Why is perfect competition rare in reality?

9. Perfect Competition – SR Abnormal loss
Draw the diagram
Show the industry position and the firm position
I’ll start you off…
Industry
Firm

10. Abnormal losses…

11. Long Run Equilibrium
So in the Long run – the abnormal losses disappear and return to equilibrium.
Who benefits from this?

12. Essay Technique

13. To what extent…. Pick one question to answer in the next 5 minutes….
…does attending all AS Economics lessons guarantee you an A grade at A level?
…does having Didier Drogba back in the Chelsea team guarantee them this year’s Premiership?

14. What are the implications?
Trigger words
Knowledge
& Understanding
Define…Describe…Give…How…Identify…Illustrate
…List…Outline…State…Summarise…What…
5 x Why?
What does this show?
So what?
Application
Apply…..Distinguish between…..Explain…Suggest…
Having identified your point you need to DEVELOP it
What are the implications?
And?
Analysis
Analyse…..Compare & Contrast…..Examine…..Investigate…
Evaluation
Assess…Comment on…Critically analyse….Do you think….
Discuss….Evaluate….To what extent….

15. Answer Structure Introduction Option A Option B Conclusion
Describe what you feel is relevant to the evaluation
Write a paragraph for each point/factor based on your analysis
Write a paragraph for each point/factor based on your analysis
Avoid repetition
Summarise your points as justification
Recommend for the future

16. Answer Structure Introduction Option A Option B Conclusion
Describe what you feel is relevant to the evaluation
Write a paragraph covering all the points that SUPPORT one side of the argument
Write a paragraph covering all the points that SUPPORT one side of the argument
Avoid repetition
Summarise your points as justification
Recommend for the future

17. To what extent does the dairy market reflect the characteristics of Perfect Competition?
10 mins to read the article and structure an answer along the lines we just discussed

18. Shut down point

19. Shut down point Profit / Loss (£mln) 1 30 20 50 60 +10 -20 2 3 40 -10
Trading situation getting worse
Profit / Loss (£mln)
Period
Total VC
Total FC
Total Costs
Total Revenue
If production takes place
If plant is shut down 1 30 20 50 60
+10
-20 2 3 40
-10 4 5
-30
Still making a profit carry on trading
Break-even (includes ‘normal profit’
Making a loss but not as bad as if plant shut down
Making a loss equal to loss plant shut down
Cheaper for the company to shut down

20. The Shutdown Point
The firm will shut down if it cannot cover average variable costs.
A firm should continue to produce as long as price is greater than average variable cost.
Once price falls below that point it makes sense to shut down temporarily and save the variable costs.

21. The Shutdown Point
The shutdown point is the point at which the firm will gain more by shutting down than it will by staying in business.

22. The Shutdown Point
As long as total revenue is more than total variable cost, temporarily producing at a loss is the firm’s best strategy since it is taking less of a loss than it would by shutting down.

23. Market price is lower that ATC. Hence the firm is making a loss
The Shutdown Decision
Profit maximisation MR = MC MC
Price
ATC
Market price is lower that ATC. Hence the firm is making a loss
Loss
P = MR
Firm should continue to produce as long as price is greater than average variable cost.
AVC
Once price falls below this point it makes sense to shut down temporarily and save the variable costs
Quantity

24. Homework
Exercise 2.2 on costs
Due tomorrow!

25. Plenary
Analyse diagrammatically the behaviour of firms in a PC market structure
Recap on how to answer questions and recognising trigger words
Investigate firms’ costs under perfect competition
Explain the meaning and implication of shut down point