Perfect Perfect Competition Competition
Dec 29, 2015
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.