Chapter 23: Pure Competition

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Chapter 23 Pure Competition

• Content and Visuals from McConnell/Brues
  Economics

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Overview

• Market Power
• Market Structures
• Perfect Competition
• Characteristics
• Price setting
• 31 total slides

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Who has the power?

• In total there can only be 100 of market power,
  or the ability to influence the price
• The more of it you have the more profit you are
  able to make
• Think about the activity last class
• Depending on how many sellers there are we create
  4 different market structures

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4 market structures

• MONOPOLYideal situation for seller when they
  alone have ability to sell product (1 seller100
  market power)
• Examples?
• OLIGOPOLYfew sellers that dominate a market
  (3-12 sellers sharing 70 of market power)
• Examples?

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Cont.

• MONOPOLISTIC COMPETITIONlots of sellers with
  SLIGHTLY different products, meaning slightly
  different prices
• Examples?
• PERFECT COMPETITIONlots of sellers with
  IDENTICAL products, meaning identical prices
• Examples?

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Doesnt exist except in theory

• Most would argue that perfect competition doesnt
  exist todaysome things might be close but true
  perfect competition doesnt
• Why?
• What makes a market perfect?

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Perfection Defined

• In order to eliminate the ability of a business
  to change the price, a few conditions or
  characteristics must be met
• 1. Lots of buyers and sellersno one big enough
  to really matter
• 2. Informed buyersmust know that there are lots
  of identical products out there

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• 3. Easy entry/exitsellers must be able to join
  or leave a market quickly with few BARRIERS TO
  ENTRY (laws, tech.)
• 4. PRICE TAKERSno ability to change
  pricecannot raise it since smart consumers know
  can get it cheaper somewhere elsewill not lower
  it since can SELL AS MANY AS YOU WANT at market
  price

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What does it look like?

• Since you can sell all of your products at the
  market price (you are a PRICE TAKER and cant
  influence it), the demand curve for your product
  is PERFECTLY ELASTICmeaning its horizontal
• Other curvesATC, AVC, MCare the same

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You know the pricehow much should you make?

• The beauty of microeconomics is that it doesnt
  require any thought
• We learn things as rules and never really have
  to understandinstead we just need to know
• You want to produce the amount that will make you
  the greatest profit
• By LAW that occurs at the point where the PRICE
  MARGINAL COST (PMC)

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Lets Look
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Regardless

• It doesnt matter what the graph looks like, or
  whether or not you are making money, production
  always occurs at PMC
• If you are above the ATC then you are making a
  profit
• If below it you are losing money by producing
• Would you ever produce when losing money?
• Yes

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Variable Costs changefixed dont

• Variable costs are what?
• Land Labor costsincrease with output
• Fixed costs are what?
• Capital expensesdont change with output
• Even if you are losing money want to shut-down
  you still have to pay for the fixed costs (ie
  factory, land, loan, etc)

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Shut-down Point

• That being said you always continue producing
  until the market price is below the min AVC point
• The bottom of that curve is always your shut-down
  point
• Anything under that you automatically shut-down
  and worry about loss later

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Continue working to lose less

• However, it is possible for you to lose money
  even when you keep working
• If the market price is between the min ATC and
  min AVC you are losing money, but will lose less
  if you continue working
• Paying for more than VC so you have some left to
  pay for FC
• In the SHORT RUN, the supply curve becomes the
  segment of MC above the min AVC level

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What about the long-run?

• In the short-run you might continue producing if
  losing money
• Would you in the long run?
• NEVERin the long run you always shut down if
  losing moneyremember the long run is when
  capital and fixed costs can changemeaning go away

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How affect market?

• Since there is easy entry/exit firms can come and
  go as they please
• If not making money firms will leave industry,
  reducing the supply which raises the market price
• But if you are making money, firms will be
  encourage to join due to that ECONOMIC PROFIT and
  increase the supply, which lowers the market price

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Long run doesnt exist

• Like the concept of perfect competition, one
  could argue that the long run doesnt exist
• Conditions constantly changing
• Even still, this creates the most important idea
  of this chapter
• The price will adjust as firms enter/exit,
  eventually settling at the lowest possible price

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Productive Efficiency

• Think backwhen does productive efficiency occur
  as equation?
• P min ATC
• As the market balances, the price will always
  fall to the min ATC of the cheapest company
• In other structures, allocative efficiency
  dominates (P MC)

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No Economic Profit for YOU!!!

• If the P ATC then you are selling for what it
  costs to produce
• This means there is a normal profit, but no
  economic profit
• In the short run it is possible to have an
  economic profit, but not in the long run

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Price will rule all

• Price will eventually find its way to the
  perfect level
• Until then, if you have P gt MC the market is
  UNDERALLOCATING resources to the production of
  that productneed to make more
• If P lt MC you are OVERALLOCATING need to make
  less

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In the end both of us benefit

• As a consumer you dont buy something unless you
  benefit, they wont sell it unless they do
• Even if there is no economic profit, or a lot of
  it, there will still be both CONSUMER PRODUCER
  SURPLUS, or extra benefit
• There is typically always a surplus for both

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• Whats it look like?

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Summary

• 4 different market structures
• Characteristics of perfect competition
• Graph of itincluding normal profit, economic
  profit, and loss
• When you shut down
• The long run productive efficiency of it