PERFECT COMPETITION

1. Characteristics
- Large no. of buyers + sellers => producing more or less by 1 seller won’t affect price
- Price-takers => market price is taken, seller have no influence on price
- Homogeneous/ Identical products
- Low barrier to entry
- Perfect infor: price n quantity of products r assumed to be known to all consumers + producers
- Perfect mobility of production factor: L + K freely move among firms

2. Curve
- D curve for P taker: perfectly elastic, no influence on price
- D curve for P maker: downward sloping => lower price, sell more

3. Short-run

Total revenue TR=P × Q

Total cost TC=TFC +TVC
Profit π=TR−TC
TR P ×Q
Avg revenue AR= = =P
Q Q
ΔTR ∂ TR
Marginal revenue MR= =
ΔQ ∂Q
TFC
Avg fixed cost AFC=
Q
TVC
Avg variable cost AVC=
Q
TC
Avg total cost ATC= =AFC + AVC
Q
 ΔTC ∂TC ∂TVC
Marginal cost MC= = =
ΔQ ∂Q ∂Q

a. Revenue & cost

- Price is constant => More Q = more revenue
 P=D= AR=MR

b. Profit max
- 2 conditions:
(1) MR = MC (TR slope = TC slope)
(2) MC cuts MR from below

c. Profit/ BE/ Loss

π=TR−TC=(P−ATC )×Q
=> π >0 when P> ATC

Profit

π=0 when P= ATC

Break-even/
Normal profit
 π <0 when P< ATC

Loss

d. Short-run curve
- Assume:
(1) No firm enter/ exit
(2) Fixed costs are always incurred (sunk cost)
- Loss minimizing: When P< ATC , P<( AFC + AVC )
(1) If P< AVC , fixed costs may be covered partly
(2) If P< AFC , shut down
- MC curve at/ above shutdown point = SR supply curve for firm under perfect competition

Firm can only produce from

Q3 onwards/ Market price is
min at P3
(if P< P 3, shut down)

4. Long-run
- Assume:
(1) Firms can enter/ exit freely
(2) L and k move freely
- If market price at P0, firms make profits
=> new entrants
=> P0 -> P1 (price equilibrium is lower) till firms only make normal profit
 - If market price at P3, firms make losses
=> exit of firms
=> P3 -> P1 (price equilibrium is higher) till firms only make normal profit

- Concl.: LR equilibrium = firms only make normal profit ( P=MR=MC =ATC )

5. Econ Efficiency
- Productive efficiency: producing at the least possible cost/ resources
- Allocative efficiency: producing goods most desired by the society (every g/s is produced up to the
point where the last unit gives a marginal benefit to consumers = MC )

=> Under perfect competition, firms achieve both allocative + productive efficiency
 MONOPOLISTIC COMPETITION

1. Characteristics
- Low concentration:
+ Many small firms w small market share
+ No collusion => Firms have independent actions
- Differentiated products:
+ Similar but not homogeneous products
+ Ea firm has small market share
+ Downward sloping demand
- D highly elastic:
+ Differentiated but not unique => many substitutions
+ Elasticity depends on (1) no. of rivals, (2) degree of differentiation
- Non-price competition:
+ Quality, service
+ Location, promotion, package
- Ltd control over price
- Low barriers to entry:
+ Low economies of scale (cost advantages earned by scale of firm’s operation)
+ Low set-up cost
2. Output and Pricing decision
a. Short-run

Econ profit Loss minimization

b. Long-run
- Firms tends to make normal profit cuz
+ Low barrier to enter/ exit -> disappearance of econ profits/ losses in LR
+ Except firms find new ways of lowering production cost to maintain econ profits.
3. Econ effects
- Mono firm charge a higher price (Pmc) & produce smaller quantity (Qmc), compared to perfect
competitive industry (Pc, Qc)
- Profit max occurs at MR=MC
=> P> MC
Firm is not at the min point of ATC curve
- Consumer surplus get smaller in Mono, but consumers can buy goods differentiated & closely to
their tastes
a. Product differentiation

Advtg. Disadvtg.
- More choice - Too much choice
- Innovation = better products - Superficial product changes => waste of
- Avoid P war resources

b. Marketing

4. Perfect vs. Mono