Competitive Markets

1
Chapter 9

• Competitive Markets

2
Competitive Market Structure

• Market power the influence that individual
  firms have on market prices.
• The less power an individual firm has to
  influence the market price, the more competitive
  is that markets structure.

3
The Assumptions of Perfect Competition

• 1. All firms sell a homogeneous product.
• 2. Customers know the product and each firms
  price.
• 3. Each firm reaches its minimum LRAC at a level
  of output that is small relative to the
  industrys total output.
• These three assumptions imply that firms are
  price takers.
• 4. Firms are free to exit and enter the industry.

4
Revenue

• Total revenue TR p x Q
• Average revenue AR (p x Q)/Q
• Marginal revenue MR ?TR/?Q
• Note For a perfectly competitive firm,
• p MR AR

5
Rules for All Profit-Maximizing Firms

• A firm should produce only if at some level of
  output, price exceeds AVC.

MC
AVC
Dollars per unit

p MR AR
q
Output
6
A Typical Firm When the Competitive Market Is in
Short-Run Equilibrium
7
Alternative Short-Run Profits of a Competitive
Firm
8
Entry and Exit

• If existing firms have positive economic profits,
  new firms have an incentive to enter the
  industry.
• If existing firms have zero profits, there are no
  incentives for new firms to enter, and no
  incentives for existing firms to exit.
• If existing firms have economic losses, there is
  an incentive for existing firms to exit the
  industry.

9
Long-Run Equilibrium

• The LR industry equilibrium occurs when there is
  no longer incentive for entry or exit (or
  expansion).
• In long-run equilibrium, all existing firms
• must be maximizing their profits.
• are earning zero economic profits.
• are not able to increase their profits by
  changing the size of their production facilities.

10
A Typical Competitive Firm When the Industry Is
in Long-Run Equilibrium