Market%20Structure:%20Perfect%20Competition

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Market Structure Perfect Competition

• Why study perfect competition?
• Standard for comparison
• More prevalent than you might think

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Analyzing Market Structure

• What is the profit-maximizing output level?
• What is the profit-maximizing price?
• What role does cost play in determining output
  and price?

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Characteristics of a Market

• Number of buyers and sellers
• Nature of the product
• Degree of information available
• Barriers to entry and exit

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Perfect Competition Price Takers

• Agriculture
• Farming
• Cattle ranching
• Long-haul trucking
• Local retail apparel
• Contract construction

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Whats So Perfect about Perfect Competition?

• Short-run resource allocation
• Mutually beneficial transactions
• Consumer surplus
• Long-run efficiency
• Produce at minimum LAC

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Short-Run Equilibrium in Perfect Competition

• Graphical representation
• Profit maximization
• Short-run supply curve
• Mathematical model
• TR - TC approach
• MR MC approach
• Marginal profit 0 approach

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Long-Run Equilibrium in Perfect Competition

• LRAC and LRMC
• Equilibrium at minimum LRAC
• Long-run industry supply curves
• Constant-cost industry
• Increasing-cost industry
• Decreasing-cost industry

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Theory of Contestable Markets

• Generally speaking, actual number of firms
  important
• Potential entry may be more important
• Actual number of firms may not matter

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Characteristics of Monopolistic Competition

• Many independently acting firms. No collusion
• Products are close, but not perfect, substitutes
• No barriers to entry or exit
• Imperfect information, bringing out the
  possibility of advertising

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Short-Run Equilibrium

• MR MC
• P gt MC gt ATC
• Profit gt 0
• Graphical example

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Long-Run Equilibrium

• Profit attracts rival firms
• Demand falls or prices rise to meet challenge
• P ATC, but still gt MC
• Excess capacity
• Graphical example

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Monopolistic Competition and Perfect Competition
A Comparison

• LR equilibriums
• Monopolistic competition
• Inefficient, excess capacity
• Too many firms, too many brands
• Too much selling expense
• Spurious product differentiation