Perfect Competition

Market Structures: Market Concentration, Product Differentiation, Barriers to Entry & Exit, Vertical
Integration & Diversification

Determined by basic market conditions – Supply & Demand

Two possible relations of firms in an industry: independent and interdependent

Independent – firms are isolated without relying on other firms such as farmers

Interdependent – firms rely on other firms e.g. require suppliers other than themselves – competing
prices such as supermarkets

Similarity and Branding

Homogenous: in some markets products are essentially identical

Differentiated: a producer can differentiate their good through branding, they can reduce price
elasticity for their good

Characteristics of Perfect Competition

1. Many suppliers
2. Goods are homogenous
3. Perfect Information
4. Firms have equal access to resources
5. No barriers to entry and exit
6. No externalities
7. Price Takers

Positives for Consumers

Price is the same and Choice is the same

Examples (close to) Perfect Competition: Currency trading, book retailing, computer game retailing,
computer hardware, home and car insurance, opticians and parcel delivery

In the Short Run: Allocative Efficient but not Productive Efficient

In the Long Run: Allocative and Productive Efficient

Shut Down Price (Short Run):

Loss if Shutdown: 100K, 100K, 100K

Loss if Continue: 120K, 100K, 90K

Continue in SR?: Should Not, Doesn’t Matter, Should Continue

Shutdown Condition: AR = AVC – should continue production in the short run or not in a loss-making
situation

Breakeven Condition: AR = AC – profit

The shut down price is where price (AR) is less than average variable cost (AVC). At this price,
(AR<AVC), the firm is making an operating loss. The total revenue is less than operating (variable)
costs. A firm can keep producing, even if AR < ATC (average total costs) because they are
contributing towards fixed costs.

Evaluation

If there is a temporary fall, firms may not lose long-term customers.

If they can gain access to credit or have high savings, it can afford a short-term operating loss.

If a firm sees AR<AVC, they may try and cut costs or increase prices.

It is possible that a firm will shut down, even if the price is greater than average variable costs e.g. if
they are pessimistic about growth of the market or a higher opportunity cost to remain in a declining
industry.

It can take time for a firm to realise they are making an operating loss.