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MARKET STRUCTURES AND

PRICING
PERFECT COMPETITION

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PRESENTERS

Agustin, Alacapa, Ayeza Apurador, Bachanicha,

Dhriann Marie Pearly Jean Charlotte

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PRESENTERS

Balansag, Ma. Baylon, khert Case, Devanhy Sanchez, Hans

Diana Jean Jean Christopher

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Perfect Competition

• Supplied by a large number of competitors.

• Because each firms claims only a very small market
share, none has the power to control price.
• Price is determined by supply and demand.
• There are no barriers preventing new firms from entering
the market.

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The basics of supply and demand

In a perfectly competitive market, PRICE is determined by the MARKET DEMAND and SUPPLY CURVES.

The DEMAND CURVE for a good or service shows the total quantities that consumers are willing and able to purchase
at various prices, other factors held constant.

Example demand curve equation: QD = 13 – 0.2P

Where: QD denotes the quantity of product demanded
P is the price per product

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The SUPPLY CURVE for a good or service shows the total quantities that producers are willing and able to supply at
various prices, other factors held constant.

Example supply curve equation: QS = 0.4P – 2

Where: QS denotes the quantity of product demanded
P is the price per product
The EQUILIBRIUM PRICE in the market is determined at point E where market supply equals market demand.
Demand-Supply equilibrium : QD = Q S

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Shifts in demand and supply

• Economic factors changes → shifts in demand and supply

curve → changes in equilibrium price and quantity.
• Non-price factor increase in demand: rightward shift.
• Entire curve shifting: quantity demanded increase at any
price.
.

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• Increase in demand → biding up of prices → amount supplied increase.

• Shift in demand: stationary supply curve movement; old to new market
equilibrium.

• Economic conditions that might shift the position of the supply curve:
 Changes in input prices
 Technology improvements

For instance:
◈Increase in input prices → upward and to the left shifting of supply curve.
◈Technological improvements → shifting of supply curve downward and to
the right.
Note:
• Movement along the demand curve — change price effect.
• Shifts in the demand curve — change in non-price factor that affects
demand.
.

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Competitive equilibrium
Decisions of the competitive firm

1. How do firms make decisions?

Businesses make decisions in response to market competition
• A fully competitive corporation just has to make one fundamental decision: how much
to produce. Consider an alternative method of laying down the fundamental concept of
profit to see why this is the case:
Profit=Total revenue−Total cost         ​
Profit=(Price)(Quantity produced)−(Average cost)(Quantity produced)​
• A perfectly competitive firm faces an elastic demand curve for its product.

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2. Determining the highest profit by comparing total

revenue and total cost
 
As an example of how a perfectly competitive
firm decides what quantity to produce, consider the
case of a small farmer who produces raspberries and
sells them frozen for $4 per pack. The sale of one
pack of raspberries will bring in $4, two packs will be
$8, three packs will be $12, and so on. If, for
example, the price of frozen raspberries doubles to
$8 per pack, then sales of one pack of raspberries will
be $8, two packs will be $16, three packs will be $24,
and so on.

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• What would happen if the price dropped

low enough so that the total revenue line
is completely below the total cost curve
—in other words, total costs were higher
than total revenues at every level of
output?

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Market equilibrium
Equilibrium
• When market supply and quantity demanded intersect or
balance each other
• Quantity supply and quantity demanded are equal (Qs=Qd)
• The corresponding price is the equilibrium price or market-
clearing price, the quantity is the equilibrium quantity.

A market in equilibrium demonstrates three characteristics:

1. The behavior of agents is consistent
2. There are no incentives for agents to change behavior
These two curves intersect at Price = $6, and 3. Dynamic process governs equilibrium outcome.
Quantity = 20. 
At this price level, market is in equilibrium. Quantity
supplied is equal to quantity demanded ( Qs = Qd). 
Market is clear.

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Surplus and Shortage

Surplus
• If the market price is above the equilibrium price, quantity
supplied is greater than quantity demanded.
• Market price will fall.

Shortage
• If the market price is below the equilibrium price, quantity
supplied is less than quantity demanded.
• The market is not clear. It is in shortage. Market price will rise
because of this shortage.

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Market efficiency
“Competitive markets provide efficient amounts of goods and services at minimum cost to the consumers who are most
willing (and able) to pay for them.”

Welfare Economics
-The study of the relationship between private markets and public welfare

Private Markets: Benefits and Costs

Example:
*THE DEMAND AND SUPPLY OF DAY CARE
- Can the couple and the grandmother conclude a mutually beneficial agreement?
- How can we measure the parties’ gains from an agreement?

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Market efficiency

• Consumer surplus - happens when the

price consumers pay for a product or
service is less than the price they're willing
to pay. Based on the economic theory
of marginal utility, this is the additional
satisfaction a consumer gains from one
more unit of a good or service.

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This transaction provides the couple with a consumer surplus

of $20 per week and the grandmother with a profit of $20 per week.

TWO (2) IMPORTANT POINTS ABOUT THE EFFECIENCY CONCEPT

1. The actual price negotiated is not a matter of efficiency.

2. Starting from any inefficient agreement, there is a different,

efficient agreement that is better for both parties.

THE DAY-CARE MARKET

The demand curve shows the monetary value that consumers
are willing to pay for each unit.
The value of a particular unit is given by the height of the
demand curve at that quantity. For this reason, the demand curve
can be thought of as a marginal benefit curve.

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Regional Demand for Day Care

At a price of $4, the total demand for day care is 8 million hours per week. Parents receive a total consumer surplus
of $32 million.

What is the total consumer surplus enjoyed by purchasers?

Consumer surplus is measured by the triangle inscribed under the demand curve and above the price line. After all,
the demand curve indicates what consumers are willing to pay, and the price line indicates what they actually pay,
so the difference (added up over all units consumed) is their total surplus.
  (.5) (12 – 4) (8) = $32 million

DAY CARE SUPPLY CURVE

Key point: This competitive outcome is efficient; that is, it delivers the maximum total dollar benefit to consumers
and producers together.

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The competitive price ($2.50) and output

(9.5 million hours)are determined by the
intersection of the supply and demand curves

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The Market is efficient if it delivers the maximum total dollar benefit to consumers and producers together. A way to
determine efficiency is to equate marginal benefit with marginal cost (MB = MC). Efficiency is obtained at equilibrium.

Deadweight/Welfare loss

MB > MC, can be more efficient by producing more units

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EFFICIENCY, EQUITY, AND DYNAMICITY OF COMPETITIVE MARKETS

• Market efficiency does not necessarily equal equity in the market.

• Markets in an economy are interdependent.
• If all markets in the economy are perfectly competitive, the economy
as a whole is efficient; that is, it delivers an efficient quantity of each
good and service to consumers at least cost.
• Competitive markets are dynamically efficiently.
• Pursuit for technological innovation.

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International trade
• International Trade is the exchange of goods and services between countries.
• Results in more competitive pricing.
• Under free trade, firms from all over the world compete for sales to consumers of different nations.

Tariffs and Quotas

Tariffs
• Tariffs are tax imposed on imports to protect particular industries from foreign competition.
• Tariffs lead to higher prices and loss of consumer surplus.

Quota
Quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can
import or export during a particular period.

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Effects of Tariff and Quota

• Consumption effect
• Output effect
• Import-reducing effect
• Revenue effect

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