Transcript
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
Perfect competitionPerfect 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)
Perfect competitionPerfect competition
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
Perfect competitionPerfect competition
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
Perfect competitionPerfect competition
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
Perfect competitionPerfect 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
Various long-run industry supply curves under perfect competitionVarious long-run industry supply curves under perfect competition
(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
Various long-run industry supply curves under perfect competitionVarious long-run industry supply curves under perfect competition
(c) Decreasing industry costs: external economies of scale(c) Decreasing industry costs: external economies of scale
b
c
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