Perfect Competition

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5/5/12

Presented By :Vandana

Perfect competition

5/5/12

Prefect competition is a market in which there are many firms selling identical products with no firm large enough, relative to the entire market, to be able to influence market price.

Advantages of Perfect Competition:

High degree of competition helps allocate resources to most efficient use Price = marginal costs Normal profit made in the long run Firms operate at maximum efficiency

Features..

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Free entry and exit to industry Homogenous product Perfect knowledge Large number of buyers and sellers Sellers are price takers No government intervention

Examples of perfect competition:

Financial markets stock exchange, currency markets, bond markets

How is the market price 5/5/12 Determined (horizontal) sum of individual Market Supply: The

supply curves

Market Demand: The (horizontal) sum of individual demand curves S S Sm1 mo

D m Q Marke t

q q 1 typical Ao firm

5/5/12 Profit Maximization in the Short Run

An individual firm takes the market price as given; the demand each individual firm faces is horizontal. MR = P: Demand

SM C SAT CVC A c a b D f 0 Q

Shut-down point

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The firm will continue to produce only if it covers its variable costs. Otherwise it will close down, since by discontinuing its operations the firm is better off and minimizes its losses. The point at which firm covers its variable cost is called shut-down or closing-down point.

5/5/12 Long-Run Equilibrium under Perfect Competition

Many optimal-size firms, each producing at the minimum long run average cost and charging the market price where:

P = MR= MC = SATC = LATC

Allocative efficiency: MC = P Productive efficiency: MC= SATC = LATC Zero economic profit (normal profit) : P = ATC

Long-Run Equilibrium in 5/5/12 a Perfectly Competitive Market

$P S m $
SATC 1
MC 2

SATC 3

LATC

SATC2

P e D m o Market o Q e A typical firm

D f

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Thank you