Pure Competition

Identical product As long as the price is the same, buyers

don’t care which supplier they buy from--- perfect substitutes

Ex- Agricultural products (rice and corn)

Product that differs slightly from competitors’ versions--- preferences exist

Buyers are not indifferent about the seller when the price of the product is the same

Ex- Shoes, dresses, retail

Economists group industries into 4 distinct market structures

1. Pure Monopoly 2. Oligopoly 3. Monopolistic Competition 4. Pure Competition

A market structure in which one firm is the sole seller of a product or service

Entry of additional firms is blocked so one firm makes up the entire industry

They make no effort to differentiate its product

Ex- local utilities- no substitutes

Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors

EX- Water company, electric company, telephone (too expensive to build the networks for competitors)

Involves only a few sellers of a standardized (identical to competitors) or differentiated product

Each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output

Ex- Steel, automobiles, household appliances

• Relatively large number of sellers producing differentiated products (clothing, furniture, books)

• Wide-spread non-price competition (product differentiation), a selling strategy in which one firm tries to distinguish its products or service from competitors on the basis of attributes such as design and craftsmanship

• Ex- Retail stores, shoes

Very large number of firms producing a standardized product (corn)

“Price Takers”- individual firms cannot change the market price, only react to changes

Individuals are at the mercy of the market

Ex- if market price is $2 why sell at $2.05 or $1.95?

Combination of Pure Monopoly, Monopolistic Competition, and Oligopoly

3 grouped together are distinguished from Pure Competition

Demand schedule for individual firm in a purely competitive industry is perfectly elastic at the market price (only 1 price available)

The firm cannot obtain a higher price by restricting output, nor should it lower prices to increase volume

Marginal Revenue , Demand, Average Revenue, and Price, are the same (MR. DARP)

Total revenue increases by a constant (price)

Total revenue curve is upward sloping with constant slope

Firm’sDemandSchedule(AverageRevenue)

Firm’sRevenue

Data

Pure Competition

Pric

e an

d Re

venu

e2 4 6 8 10 12

131

262

393

524

655

786

917

1048

$1179

Quantity Demanded (Sold)

MR = D = AR = P

TR

P QDTR MR

$131131131131131131131131131131131

0123456789

10

$0131262393524655786917

104811791310

$131131131131131131131131131131

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