07 Layton5e Ppt Edms

8/18/2019 07 Layton5e Ppt Edms

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CHAPTER 7

Perfect competition


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KEY POINTS

• Market structures

• Caracteristics of perfect competition

• Perfect!" competiti#e firm as a price taker • Profit ma$imisation con%ition

• Sort&run profit an% !osses

• Sut%o'n ru!e

• (on)&run e*ui!i+rium

• Tree t"pes of !on)&run supp!" cur#es


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MARKET STR,CT,RES

• Market structure c!assifies some of te ke"traits of a market- inc!u%in).

/ te num+er of firms / te simi!arit" of te pro%ucts so!%

/ te ease of entr" into an% e$it from te market0

• Tis capter is concerne% 'it o' teperfect!" competiti#e market %etermines prices-output an% profits0


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MARKET STR,CT,RES


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PER1ECT COMPETITION


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(AR2E N,M3ER O1 SMA(( 1IRMS

• A perfect!" competiti#e market is ma%eup of tousan%s of sma!! firms0

• 1irms act in%epen%ent!"0• As no firm pro%uces a si)nificant sare

of tota! output- no firm can- +" itse!f-

affect te market price / firms in tismarket are kno'n as price takers0


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HOMO2ENEO,S PRO4,CT

• Homo)eneous pro%ucts mean pro%uctsfrom one firm cannot +e %istin)uise%

from anoter0• 3u"ers are in%ifferent as to 'ose

pro%uct te" +u"0

• 2oo%s or ser#ices of a!! te firms arei%entica!0


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5ERY EASY ENTRY AN4 E6IT

• Ne' firm face no +arriers to its entr" into tatmarket0

• In perfect!" competiti#e markets tere are no

+arriers to entr" or e$it into te market0


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IS THIS A REA(&8OR(49 MARKET:

• No rea!&'or!% market e$act!" fits teperfect competition assumptions0

• 3ut some markets %o appro$imate temo%e! fair!" c!ose!"0 / E$amp!es. farm pro%uct markets- te

interstate roa% transport market- !a'n&mo'in) or c!eanin) markets0


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PROMOTIN2 COMPETITION AN4

1AIR TRA4IN2 IN A,STRA(IA• Te Austra!ian Competition an% Consumer

Commission ; ACCC< promotes competition-

fair tra%e an% consumer protection in Austra!ia0• In Ne' =ea!an% te Commerce Commission

as simi!ar o+>ecti#es0

• 2o#ernment competition po!icies aim to

encoura)e in%ustries to +ecome more efficient+" +ea#in) as if te" 'ere competiti#e0

http://www.accc.gov.au/http://www.comcom.govt.nz/http://www.comcom.govt.nz/http://www.accc.gov.au/


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THE PER1ECT(Y COMPETITI5E

1IRM AS A PRICE TAKER• A price taker is a se!!er tat as no contro! o#er

te price of te pro%uct it se!!s0

• Costs are te on!" tin) tat it can contro!0


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THE IN4I5I4,A( 1IRM9S

4EMAN4 C,R5E• Conse*uent!" te in%i#i%ua! firm as a

ori?onta! ;perfect!" e!astic< %eman% cur#e0

• 3ein) on!" one of man" sma!! firms- it 'ou!%se!! notin) if it set te price a+o#e tepre#ai!in) market price0

• It 'ou!% not %rop its price +ecause it can se!! a!!it 'ants to at te pre#ai!in) price0


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THE MARKET PRICE AN44EMAN4 1OR THE PER1ECT(Y

COMPETITI5E 1IRM


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SHORT&R,N PRO1IT MA6IMISATION

Question: Since the perfectly competitiverm has no control over price, what does

the rm control?

Answer: The quantity of output to produce

that maximises prot.


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PRO1IT MA6IMISATION

CON4ITION


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TOTA( RE5EN,E/TOTA( COST

METHO4• E$i+it 70@ so's a "potetica! %ata of a

perfect!" competiti#e firm0

• 1rom te ta+!e- te TR&TC meto% so's tefirm facin) a. / !oss if it pro%uces +et'een an% B units per our

/ risin) profit +et'een @ an% units of output per our

/ profit fa!!s after tat0


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TOTA(RE5EN,E/TOTA( COSTMETHO4


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METHO4• E$i+it 70D i!!ustrates )rapica!!" tat

ma$imum profit occurs 'ere te #ertica!

%istance +et'een te tota! re#enue an%tota! cost cur#es is at a ma$imum0


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METHO4


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MAR2INA( RE5EN,E E,A(S

MAR2INA( COST METHO4• Mar)ina! re#enue is te can)e in tota!

re#enue from te sa!e of one a%%itiona!

unit of output0• Mar)ina! cost is te can)e in tota! cost

from te pro%uction of one e$tra unit of

output0


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MAR2INA( COST METHO4• Te firm ma$imises profit +" pro%ucin)

te output 'ere mar)ina! re#enue

e*ua!s mar)ina! cost ;MR FMC


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MAR2INA( COST METHO4• 1rom E$i+it 70G- +et'een ei)t an% nine units of

output- te MC cur#e is +e!o' te MR cur#e ;G 7as so'n in E$i+it 70@


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MAR2INA( COST METHO4• 1rom E$i+it 70G- +e"on% nine units of output- te MC

cur#e is a+o#e te MR cur#e an% te profit cur#e fa!!s03et'een nine an% ten units of output- MC is 7G an%MR is 70 ;Profit fa!!s<


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MAR2INA( COST METHO4• Tus- if te firm pro%uce nine units of output-

te MR cur#e e*ua!s te MC cur#e an% profit is

ma$imise%0• To ma$imise profits- te firm sou!% pro%uce at

te point 'ere MR F MC .


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SHORT&R,N PRO1IT

• If P J ATC - an% tefirm is pro%ucin) a!e#e! of output

'ere MR F MC -te firm isma$imisin) profitsin te sort run0


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SHORT&R,N (OSS

• If P ATC - an% tefirm is pro%ucin) a!e#e! of output

'ere MR F MC -te firm isminimisin) !ossesin te sort run0


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SH,T4O8N R,(E

• If P AVC - tere#enue fromeac unit

pro%uce% fai!s toco#er te #aria+!ecosts ofpro%uction0

• Te firm sou!%sut%o'n0


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1IRM9S SHORT&R,N

S,PP(Y C,R5E• Te perfectcompetitor9s supp!"cur#e is e*ua! to

te firm9s MC cur#ea+o#e teminimum point ofte AVC cur#e0


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IN4,STRY9S SHORT&R,N

S,PP(Y C,R5E


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(ON2&R,N E,I(I3RI,M


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(ON2&R,N E,I(I3RI,M

• (on)&run e*ui!i+rium occurs at temarket price tat ena+!es firms to make

a norma! profit0


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(ON2&R,N E,I(I3RI,M


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THREE TYPES O1 (ON2&R,N

S,PP(Y C,R5ES


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CONSTANT&COST IN4,STRY


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INCREASIN2&COST IN4,STRY

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07 Layton5e Ppt Edms