PERFECT COMPETITION

A market structure with many fully informed buyers

and sellers of a standardized product and no obstacle
to entry or exit of firms in the long run.
MARKET STUCTURE

Describes the important features of a market, such as

the number of suppliers, the product’s degree of
uniformity, the ease of entry into the market and the
forms of competition among firms.
 Example of perfectly competitive markets : agricultural
products, such as wheat, corn, and livestock; markets
of basic commodities, such as gold, silver and copper;
markets for widely traded stock ,such as Google, Exxon-
Mobile, and General Electric; and markets for foreign
exchange, such as yen, euros, and pesos.
 PERFECTLY COMPETITIVE MARKET STRUCTURE

 This is characterized by:

A. Many buyers and sellers
B. Firms sell a commodity
C. Buyers or sellers are fully informed about the price and
availability of all resources and products
D. Firms and resources are freely mobile
 Commodity a standardized product ,a product that
does not differ across producers, such as bushels of
wheat or an ounce of gold.
DEMAND UNDER PERFECT COMPETITION

Suppose the market in question is the world

market for wheat and the firm in question is a
wheat farm. In the world market for wheat, there
are hundreds of thousands of farm, so any one
supplies only a tiny fraction of market output.
 SHORT-RUN PROFIT MAXIMIZATION
 Each firms tries to economic profit. Firms that ignore
this strategy don’t survive for long. Economic profit
equals total revenue minus total cost, including both
explicit and implicit cost.
 There are two main profit maximization methods used
they are:
1) Total Revenue Minus Total Cost

The firms maximize economic profit by finding the

quantity at which total revenue exceeds total cost by the
greatest amount. The firm’s total revenue is simply its
output times the price.
2) Marginal Revenue Equals Marginal Cost
The firm increase production as long as each
additional unit adds more total revenue than to total cost
that is ,as long as marginal revenue exceeds marginal
cost.
 Golden Rule Of Profit Maximization  To maximize
profit or minimize the loss ,a firm should produce the
quantity at which marginal revenue equals marginal
cost.
 MAXIMIZING SHORT-RUN LOSSES
 A firm in perfect competition has no control over the
market price.
1. Fixed Cost and Minimizing Losses
 A firm produces rather than shuts down if total revenue
exceeds the variable cost of production.
2. Marginal Revenue Equals Marginal Cost
3. Shutting Down in the Short Run
THE FIRM AND INDUSTRY SHORT-RUN SUPPLY
CURVES

1. The short-run firm supply

 a curve that shows how much a firm supplies
at each price in the short run
2. The short-run industry supply curve
 a curve that indicates the quantity supplied by
the industry at each price in the short run
3. Firm supply and market equilibrium
 Perfect Competition in the Long Run
In the short run ,the quantity of variable resources
can change, but other resource, which mostly
determine firm size, are fixed.
 Zero Economic Profit in the long run

This long run adjustment continues until the

market supply curve intersects the market demand
curve at a price that corresponds to the lowest point
on each firm’s long run average cost curve, or LRAC
curve.
THE LONG RUN ADJUSTMENT TO A CHANGE IN
DEMAND

1. Effect of an increase in demand

2. Effect of a decrease in demand
THE LONG RUN INDUSTRY SUPPLY CURVE

 A curve that shows the relationship between price and

quantity supplied by the industry once firms adjust in
the long run to any change in market demand
 Constant-Cost Industries

 An industry in which each firm’s long run average cost

curve does not shift up or down as industry output
changes
 Increasing-cost industries

Industries in which firms encounter higher average costs

as industry output expands in the long run
PERFECT COMPETITION AND EFFICIENCY

 Two concepts of efficiency are used to judge market

performance
1) Productive Efficiency: Making Stuff Right  occurs
when the firm produces at the minimum point on its
long-run average cost curve, so the market price
equals the minimum average cost .
2) Allocative Efficiency: Making the Right Stuff  occurs
when firms produce the output that consumers value
most