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PERFECT COMPETITION

PRESENTED BY:
GROUP 10:
Lakshmi kruthiga. P
15Y208
Mohammed Hameeth. M 15Y209
Mohammed Hussain. I 15Y210
Naveen Kumar. D
15Y211

Synopsis:
Introduction
Assumptions of perfect competition
Demand and revenue for a firm in
perfect competition
Short run equilibrium
Long run equilibrium
Conclusion

Referred from:
Economics
- Lipsey and Chrystal
(Eleventh edition)

INTRODUCTION:
What is perfect competition?
Buyers and sellers are so numerous.
All elements of monopoly are absent.
Market price of a commodity is
beyond the control of individual
buyers and sellers.

Assumptions of perfect competition:

1.All the firms in the industry


sell an identical or
homogeneous product.
2.Buyers are well informed
about the characteristics of
the product being sold and
the prices charged by each

Assumptions of perfect competition:

3. The output of each firm, is only a


small fraction of the industrys
output.
4. Each firm is a price taker. (i.e)
Each firm can alter its output
without affecting markets price
on its product.

Assumptions of perfect competition:


5. Theres freedom of entry and exit.
Any firm can enter and exit if it
wishes
A perfectly competitive market is one
in which individual firms have zero
market power.

Characteristics of perfect competition.

Demand and revenue for a firm in perfect competition

Each firm faces a demand curve that


is horizontal.
Variations in the firms output have
no noticeable effect on price.

(a) Competitive
industrys demand
curve

(b) Competitive firms


demand curve

Demand and revenue for a firm in perfect competition

The industrys demand curve is


negatively sloped.
The firms demand curve is
horizontal.
Notice the difference in quantities
shown on the horizontal scale in each
part of the figure.

Revenue concepts for a price-taking firm

When price is fixed, average, marginal


revenue, and price are equal to each
other.
Quantit Price
TR = p.q AR =
MR =
y sold
(q)

(p)
(Rs)

TR/q

TR/q

10

30

11

33

12

36

13

39

Short run equilibrium

In short run, number of firms in


industry is fixed.
Possible situations in which firms
may find themselves in the short run
are three types:
Super Normal profit
Loss
Normal profit

Short run equilibrium.


Super normal profit:

Short run equilibrium


The price is P1.
The firm produces at the level of
output where MC = MR. This occurs
at point A.
At Q1, AR > AC.
The firm runs in profitable condition.
It is called as super normal profit.

Short run equilibrium


Loss:

Short run equilibrium


The price is P2.
The firm will not be making a profit.
The AC curve is above the AR curve
at all levels of output.
This occurs at point D giving output
Q2. At Q2, AR < AC.
In the diagram, this is the area
DEFP2(the red box) is the loss.

Short run equilibrium


Normal profit:

Short run equilibrium


The price is P3.
Again the firm will produce the level
of output for which MC = MR.
Output is Q3. At this point, AR = AC,
so the firm is making normal profit.

Long run equilibrium


In the long run,allfirms in a
perfectly competitive market
earnonlynormal profit.
There is entry and exit.
The number of firms in the industry
can change as well.
A firm that suffer loses can leave the
market, and a firm that anticipates
gains can enter.

From super normal profit to normal


profit.

From super normal profit to normal


profit.
In the diagrams above, the initial
price is P1.
AR > AC, so each firm is making
super normal profits.
But what will happen as we move
towards the long run?
There arenobarriers to entryor exit
in a perfectly competitive market.

From super normal profit to


normal profit.

From super normal profit to normal


profit.
New firms will be attracted, in quite
large numbers, into the market.
This will increase market supply,
shifting the supply curve to the right.
There will benoincentive for any
firm to enter or leave the industry.

From loss to normal profit

From loss to normal profit

From loss to normal profit


Each firm is making a loss at the initial
price.
AR < AC.
Again, there areno barriers to exit.
Once the supply curve has shifted then
every firm in the industry will be
earning normal profit.
This is, therefore, the long run
equilibrium.

Conclusion
Perfect competition is a special case
where the product is homogenous.
Hence the perfect competition is not
directly applicable to most markets
for goods and services.

Questions?