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Chapter 11
Perfect Competition
The concept of competition is used in two ways in economics.
Competition as a process is a rivalry among firms. Competition as the perfectly competitive market structure.
Competition as a Process
Competition involves one firm trying to take away market share from another firm. As a process, competition pervades the economy.
6
4 2 0 Market demand
6
4 2 0 10
1,000
3,000 Quantity
20
30
Quantity
Marginal Revenue
Since a perfect competitor accepts the market price as given, for a competitive firm, marginal revenue is price (MR = P).
Marginal Cost
Initially, marginal cost falls and then begins to rise. Marginal concepts are best defined between the numbers.
MC
$35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00
0 1 2 3 4 5 6 7 8 9 10
$28.00 20.00 16.00 14.00 12.00 17.00 22.00 30.00 40.00 54.00 68.00
60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 Quantity A A C B P = D = MR
Marginal cost
C
50
40 A B
30 20
10 0 1 2 3 4 5 6 7 8 9 10 Quantity
Loss
Profit
1 2 3 4 5 6 7 8 9
Quantity
Price 60
50
40 30 20 10 0 2 4 6 8
SRATC
P = MR
LRATC
Quantity
An Increase in Demand
An increase in demand leads to higher prices and higher profits. Existing firms increase output and new firms will enter the market, increasing output still more, price will fall until all profit is competed away.
An Increase in Demand
If the the market is a constant-cost industry, the new equilibrium will be at the original price but with a higher output.
A market is a constant-cost industry if the long-run industry supply curve is perfectly elastic.
An Increase in Demand
The original firms return to their original output but since there are more firms in the market, the total market output increases.
An Increase in Demand
In the short run, the price does more of the adjusting.
In the long run, more of the adjustment is done by quantity.
S0SR
$9 7 A B C S1SR SLR D1 D0 0 700 840 1,200 Quantity 0 $9 Profit 7 A B
MC AC
10 12 Quantity
An Increasing-Cost Industry
If inputs are specialized, factor prices are likely to rise when the increase in the industry-wide demand for inputs to production increases.
An Increasing-Cost Industry
This rise in factor costs would force costs up for each firm in the industry and increases the price at which firms earn zero profit.
An Increasing-Cost Industry
Therefore, in increasing-cost industries, the long-run supply curve is upward sloping.
A Decreasing-Cost Industry
If input prices decline when industry output expands, individual firms' marginal cost curves shift down and the long-run supply curve is downward sloping.
A Decreasing-Cost Industry
Input prices may decline to the zeroprofit condition when output rises and when new entrants make it more costeffective for other firms to provide services to all firms in the market.
Quantity
Perfect Competition
End of Chapter 11