lesson 5 perfect comp

Perfect Competition

Perfect Competition

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Pure or Perfect Competition…Pure or Perfect Competition…

Pure or perfect competition is rare in the real world, but the model is important because it helps analyze industries with characteristics similar to pure competition.

Characteristics…Characteristics…

1. Many sellers: there are enough so that a single seller’s decision has no impact on market price.

2. Homogenous or standardized products: each seller’s product is identical to its competitors’.

3. Firms are price takers: individual firms must accept the market price and can exert no influence on price.

4. Free entry and exit: no significant barriers prevent firms from entering or leaving the industry.

Perfectly Elastic Demand Curve…Perfectly Elastic Demand Curve…

The individual firm will view its demand as perfectly elastic. A perfectly elastic demand curve is a horizontal line at the price. The demand curve for the industry is not perfectly elastic, it only appears that way to the individual firms, since they must take the market price no matter what quantity they produce. Therefore, the firm’s demand curve is a horizontal line at the market price.

Demand Curve of the Firm & IndustryDemand Curve of the Firm & Industry

FIRM INDUSTRY

Perfect competitionPerfect competition

Short-run equilibrium of firm and industry (profit

maximising)

Short-run equilibrium of firm and industry (profit

maximising)

O

£

(b) Firm

Q (thousands)

O

(a) Industry

P

Q (millions)

S

D

Pe

MC

ARD = AR

= MR

Qe

AC

AC

Short-run equilibrium of industry and firm under perfect competition

Short-run equilibrium of industry and firm under perfect competition


Optimum position for a loss-making firm

Optimum position for a loss-making firm

Qe

P1

D1 = AR1

= MR1

AR1

O O

(a) Industry

P £

Q (millions)

S

D

(b) Firm

MC AC

AC

Q (thousands)

Loss minimising under perfect competitionLoss minimising under perfect competition

Short-run shut-down pointShort-run shut-down point

O O

(a) (a) Industry Industry

P £

P2

Q (millions)

S

D2

(b) (b) Firm Firm

AR2

D2 = AR2

= MR2

MC AC

AVC

Q (thousands)


Short-run supply curve of the firmShort-run supply curve of the firm

O O

(a) Industry

P £

P1

Q (millions)

S

D1

(b) Firm

D1 = MR1

MC

P2

D2 = MR2

D2

P3

D3 = MR3

D3

Q (thousands)

Deriving the short-run supply curveDeriving the short-run supply curve

a

b

c

= S


The industrysupply curveThe industrysupply curve

O O

(a) Industry(a) Industry

P £

P1

Q (millions)

S

D1

(b) Firm(b) Firm

D1 = MR1

S

a

P2

D2 = MR2

D2

b

P3

D3 = MR3

D3

c

Q (thousands)

Deriving the industry short-run supply curveDeriving the industry short-run supply curve


Long-run equilibriumLong-run equilibrium

O O

(a) (a) Industry Industry

P £

Q (millions)

S1

D

(b) (b) Firm Firm

LRAC

PL

P1

QL

Se

AR1 D1

ARL DL

Q (thousands)

Long-run equilibrium under perfect competitionLong-run equilibrium under perfect competition

New firms enterSupernormal profitsProfits return

to normal

£

Q O

(SR)AC

(SR)MC

LRAC

AR = MR

DL

LRAC = (SR)AC = (SR)MC = MR = AR

Long-run equilibrium of the firm under perfect competitionLong-run equilibrium of the firm under perfect competition


Long-run industry supply curves

Long-run industry supply curves

P

Q O

Various long-run industry supply curves under perfect competitionVarious long-run industry supply curves under perfect competition

Long-run S

S1

D1

S2

D2

a

(a) Constant industry costs(a) Constant industry costs

b

c

Long-run S

P

Q O

S1

D1

S2

D2

a


(b) Increasing industry costs: external diseconomies of scale(b) Increasing industry costs: external diseconomies of scale

b

c

Long-run S

P

Q O

S1

D1

S2

D2

a


(c) Decreasing industry costs: external economies of scale(c) Decreasing industry costs: external economies of scale

b

c

lesson 5 perfect comp

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