Perfect CompetitionPerfect CompetitionPerfect CompetitionPerfect Competition

Market Structures

Perfect Competiti

on

Monopoly

Imperfect Competiti

on

Oligopoly

Price Discrimination

Objective of firms ??

a)Maximise Profits

b)Minimise Profits

c)Maximise Losses

Firms maximise profits when ??

a) MC > MR

b) MC < MR

c) MC = MR provide MC > MR at all

quantities after that

Firms in Perfect Competition

are??

a)“Price givers”

b)“Price takers”

Price taker means ??

a)The firm sets the price

b)The industry sets the price

IndustryPrice

Quantity

P1

Q1

P1

AR

FirmPrice

Quantity

S

Q

Eg. of Perfect Competition

Assumptions for Perfect Competition (P 95/96)

1) Many small firms in the industry:

2) Many buyers in the industry:

3) Firms aim to maximise profits:

4) Freedom of entry into & exit from the industry:

5) Widespread knowledge of profit earned:

6) Products are homogeneous:

7) Perfect elasticity of the factors of production:

8) Firms produce on the lowest point on the Average Cost Curve.

Advantages of Perfect Competition

• Low prices:

• No waste/efficiency:

• Guaranteed same quality from all suppliers @ the same price:

Disadvantages• No Choice:

• No economies of scale• Do not benefit form lower unit

costs as production increases.

Explanation• In the short run firms in perfect competition

earn super normal profits as AR > AC.• Because there is full knowledge of profits

other firms will enter the market.• This causes the supply curve to shift to

the right.• This causes the price to fall.• This will cause the demand/AR to move

down.

Continued……• This eliminates (gets rid of) SNP in

the long run. • Perfect competition is as very

efficient because;• Firm produce at the lowest point

of average cost curve– point A.• Therefore firm do not waste any

scarce resources.