1. Perfect Competition
© 2003 South-Western/Thomson Learning

2. Market Structure
All the characteristics of a market than influence the behavior of buyers and sellers
Number of buyers and sellers?
Standardized products?
Barriers to entry or exit?

3. Market Structure Four basic types of markets: Perfectly competitive
Monopolistic
Monopolistically competitive
Oligopolistic

4. What Is Perfect Competition?
The Three Requirements for Perfect Competition

5. Three Requirements of Perfect Competition
1. There are large numbers of buyers and sellers, and each buys or sells only a tiny fraction of the total quantity in the market.

6. Three Requirements of Perfect Competition
2. Sellers offer a standardized product.
3. Sellers can easily enter into or exit from the market.

7. The Perfectly Competitive Firm
Goals and Constraints
Cost and Revenue Data
Finding the Profit-Maximizing Output Level
Measuring Total Profit
The Firm’s Short-Run Supply Curve

8. The Perfectly Competitive Firm
Faces a cost constraint like any other firm
Cost of producing any given level of output depends on the firm’s production technology and the prices it pays for its inputs

9. The Competitive Industry and Firm
(b)
Market
Firm
Price
Price
per
per
Ounce
Ounce S D
$400
$400
Demand
Curve
Facing
the Firm
Ounces of
Ounces of
Gold per Day
Gold per Day a a a

10. The Perfectly Competitive Firm
Price Taker
Any firm that treats the price of its product as given and beyond its control.

11. The Perfectly Competitive Firm
Ounces of
Gold per Day TR
550
$2,800
2,100
(a) TC
Maximum
Profit
per Day
= $700
Dollars MC
(b) 1 2 3 4 5 6 7 8 9 10
$400
d = MR
Slope = 400

12. The Perfectly Competitive Firm
For a competitive firm, marginal revenue at each quantity is the same as the market price.
Thus, the marginal revenue curve and the demand curve facing the firm are the same - a horizontal line at the market price.

13. Finding the Profit-Maximizing Output Level
Total Revenue and Total Cost Approach
Marginal Revenue and Marginal Cost Approach

14. Finding the Profit-Maximizing Output Level
Measuring total profit:
Profit per unit = P – ATC

15. Measuring Profit or Loss
Ounces of
Gold per Day
Dollars 1 2 3 4 5 6 7 8 9 10
$400
300
Profit per
Ounce
$100
d = MR MC
ATC
(a) Economic Profit
Ounces of
Gold per Day
Dollars MC
ATC
d = MR
$300
200 1 2 3 4 5 6 7 8 9 10
Loss per
Ounce
$100
(b) Economic Loss

16. Measuring Profit or Loss
A firm earns profit when P>ATC
A firm suffers a loss when P<ATC

17. Short-Run Supply Curve

18. Short-Run Supply Curve
As the price of output changes, the firm will slide along its MC curve in deciding how much to produce.

19. Short-Run Supply Curve
Shutdown Price
Price at which a firm is indifferent between producing and shutting down

20. Firm’s Supply Curve
Curve that shows the quantity of output a competitive firm will produce at different prices:
For all prices above the minimum point on its AVC curve, the supply curve coincides with the MC curve.
For all prices below the minimum point on its AVC curve, the firm will shut down - so its supply curve is a vertical line segment at zero units of output.

21. Competitive Markets in the Short Run
The (Short-Run) Market Supply Curve
Short-Run Equilibrium

22. Competitive Markets in the Short Run
Market Supply Curve
A curve indicating the quantity of output that all sellers in a market will produce at different prices

23. The Market Supply Curve
(b)
Firm
Market
Price
Price
per Bushel
per Bushel
Firm’s
Market
Supply
Supply
$3.50 Cu r ve
$3.50
Curve
2.50
2.50
2.00
2.00
1.00
1.00
0.50
0.50
2,000
4,000
7,000
Bushels
400,000
700,000
Bushels
5,000
per Year
200,000
500,000
per Year a a a

24. Short-Run Equilibrium
(a)
(b)
Market
Firm
Price
Dollars D 1
ATC
per
Bushel S MC
$3.50 D 2
$3.50 d 1
Profit per
Bushel
at p = $3.50
Loss per
Bushel
at p = $2
2.00
2.00 d 2
400,000
700,000
Bushels
4,000
7,000
Bushels
per Year
per Year a a a a

25. Competitive Markets in the Long Run
Economic profit and loss are the forces driving long-run change
Expectation of continued economic profit causes outsiders to enter the market
Expectation of continued economic losses causes firms in the market to exit

26. Competitive Markets in the Long Run
Bushels
per Year
Price
per
Bushel S 1 D A
900,000
$4.50
With initial
supply curve
, market
price is $
(a)

27. Competitive Markets in the Long Rund 1
Bushels
per Year
Dollars
9,000
$4.50
ATC MC
5,000
. . . so each
firm earns an
economic profit
(b)

28. Competitive Markets in the Long Run
Bushels
per Year
Price
per
Bushel
1,200,000
2.50 S 1 D A E 2
900,000
$4.50
Profit attracts
entry, shifting the
supply curve
rightward . . .
(c)

29. Competitive Markets in the Long Rund 1 2
Bushels
per Year
5,000
9,000
2.50
$4.50
ATC MC
. . . until market
price falls to $2.50
and each firm earns
zero economic profit
(d)

30. Competitive Markets in the Long Run
In a competitive market, positive economic profit continues to attract new entrants until economic profit is reduced to zero.

31. Competitive Markets in the Long Run
In a competitive market, economic losses continue to cause exit until the losses are reduced to zero.

32. Competitive Markets in the Long Run
Normal Profit
Another name for zero economic profit

33. Competitive Markets in the Long Run
In long-run equilibrium, every competitive firm will select its plant size and output level so that it operates at the minimum point of its LRATC curve.

34. Competitive Markets in the Long Run
(b)
Dollars
Dollars
LRATC
LRATC 1 MC 1
ATC P MC 2 1 d 1
= MR
ATC 2 E P * d 2
= MR q 1
Output q *
Output
per
per
Period
Period a a

35. Competitive Markets in the Long Run
At each competitive firm in long-run equilibrium,
P = MC = minimum ATC = minimum LRATC

36. What Happens When Things Change?
A Change in Demand
Market Signals and the Economy

37. A Change in Demand a a INITIAL EQUILIBRIUM (a) Market (b) Firm Price S1
Dollars MC
per D 1
Unit
ATC 1 P A P 1 d 1
= MR 1 A Q
Output q
Output 1 1
per
per
Period
Period
NEW EQUILIBRIUM
(c) Market
(d) Firm
Price
Dollars
per
Unit S 1 D 2 MC B S 2 B P D 1 P d SR
= MR SR SR S LR
ATC 2 C
ATC 1 C P P 2 2 d 2
= MR P A P 1 1 d 1
= MR A Q Q Q
Output q q q
Output 1 SR 2 1 2 SR
per
per
Period
Period a a

38. A Change in Demand
Long-run Supply Curve
Indicates the quantity of output that all sellers in a market will produce at different prices, after all long-run adjustments have taken place

39. Increasing Cost Industry
A Change in Demand
Increasing Cost Industry
An industry in which the long-run supply curve slopes upward because each firm’s ATC curve shifts upward as industry output increases

40. Constant Cost Industry
A Change in Demand
Constant Cost Industry
An industry in which the long-run supply curve is horizontal because each firm’s ATC curve is unaffected by changes in industry output.

41. Decreasing Cost Industry
A Change in Demand
Decreasing Cost Industry
An industry in which the long-run supply curve slopes downward because each firm’s ATC curve shifts downward as industry output increases

42. Market Signals and the Economy
Price changes that cause firms to change their production to more closely match consumer demand

43. Technological Change in Perfect Competition
(a) Market
(b) Firm
Price
Dollars S 1
per
per
Bushel
Bushel S 2
ATC 1 D A
ATC 2 $3 $3 d 1
= MR B 2 2 d 2
= MR Q Q
Bushels
1000
Bushels 1 2
per Day
per Day a a a