PURE COMPETITION

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PURE COMPETITION
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FOUR MARKET MODELS OVERVIEW

• Pure Competition
• Many sellers
• Identical product
• Monopolistic Competition
• Many sellers
• Differentiated product

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FOUR MARKET MODELS OVERVIEW

• Oligopoly
• Few sellers
• Monopoly
• One seller

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PURE COMPETITION
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CHARACTERISTICS

• Many firms
• Lots of competition
• Each firm too small to affect price
• Identical product
• One sellers product same as others
• Low- barriers to entry
• Easy to enter/leave market
• Result Price takers
• Must take market price

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MARKET CURVES

• Market All firms in industry
• Market D curve
• Downsloping
• Market S curve
• Upsloping
• Market price
• Set by intersection

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FIRMS CURVES

• Demand Curve
• Horizontal at Price set by Market
• Perfectly elastic
• Significance?
• Firm
• can sell all it produces at Price
• loses all customers if it raises price

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REVENUE FIGURES

• Total Revenue (TR)
• Price x Quantity
• Marginal Revenue (MR)
• ? TR ? ? Q
• Additional income from additional sale
• MR P
• True of Pure Competitive firm ONLY

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PROFIT MAXIMIZATION RULE

• Produce Q where
• MC MR
• Why?
• MC gt MR
• Adds more to costs than revenue
• Eats into profits
• MR gt MC
• Adds more to revenue than costs
• Greater profits possible with more Q

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PROFIT CALCULATIONS

• Total Profits
• TR TC
• Average Profits
• Price ATC
• Average Profits x Q Total Profits

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PRODUCTION DECISIONS SHORT-RUN

• Produce Q where MC MR if -
• P gt ATC profits
• P ATC break even
• P gt AVC loss-minimization
• Lose part of AFC only
• HOWEVER, if -
• P lt AVC shut-down (Dont produce)
• Lose AFC only

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SHORT-RUN SUPPLY CURVE

• MC lying above AVC curve
• Remember.
• Produce Q where MR MC if
• P (or gt) AVC
• So, any point on MC (above AVC) intersected by
  MR would be produced

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SUPPLY CURVE SHORT-RUN

• Production Costs up?
• S shifts to left and Q down
• Production Costs down?
• S shifts to right and Q up

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LONG-RUN DECISIONS

• Profits
• Expand
• Losses
• Exit

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LONG-RUN for PURELY COMPETITIVE FIRM

• Break-even Price ATC
• Covers explicit and implicit costs
• Why?
• Profits
• Firms enter
• Supply ? causing Price to ?
• Losses
• Firms exit
• Supply ? causing Price to ?

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PURE COMPETITION LONG-RUN SUMMARY

• P ATC at its lowest point
• Zero profits due to entry/exit of firms
• Low barriers
• P MC Allocative efficiency
• Right amount of product from Opportunity Cost
  perspective
• Identical product
• Many firms