GROUP PRESENTATION

ON PERFECT
COMPETITION
MARKET( SHORT RUN )
BY
• DHEEMAN JAIN
• NAMAN KALRA
• HARNOOR SINGH
• IPSHITA SINGHAL

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 • Perfectly Competitive Markets:
Meaning: Perfectly competitive markets are
markets in which there are a huge number of sellers and
buyers.
The model of perfect competition rests on three
PROFIT assumptions
1.Price Taking: Since many firms compete in perfect
MAXIMIZATION competition markets, each firm takes the market price as
given. It applies to the consumer will because they have
AND PERFECT to buy the goods at identical price.

COMPETITION 2. Product Homogeneity: It means that firms are

producing goods.
3. Free entry and exits: It is assumed the firms are free to
enter and exit the market
4. Large no. of buyers and sellers: Since the product
offered in the market is homogeneous, therefore there
are large no. of buyers and sellers.
Examples of Perfect
Competition
•1. Agriculture:
•In this market, products are very similar. Carrots,
potatoes, and grain are all generic, with many
farmers producing them. 
•2. Foreign Exchange Markets:
•In this market, traders exchange currencies. As
there is only one US Dollar, one Great British Pound,
and one Euro, the product is homogenous.
•3. Online shopping:
•We may not see the internet as a distinct market.
However, the internet is home to many buyers and
many sellers.

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Do Firms Maximize Profits?

Yes, we assume that profit maximization is one of the most basic goal of
every business but specially for small firms. Firms that have been in business
for long period of time are likely to care a lot about profit maximization.
Marginal The Firm’s Profit is the difference between
revenue and cost.
Revenue,  π (q) = R(q) – C(q)
Marginal  Marginal Revenue is the slope of
Cost and revenue curve.
Marginal cost is the slope of cost curve.
Profit Profit = Marginal revenue (MR) –
Maximizatio Marginal cost (MC).
n
 Eastablishing Equilibrium in a perfectly
competitive market using MR-MC
approach
CONDITIONS FOR EQUILIBRIUM
• MR=MC=Price
• MC must be rising

IN SHORT RUN THERE ARE THREE

CASES
• Super normal profits
• Normal profits
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• losses
 Super
normal
profits
AR=OPBQ
AC=OEAQ
Profit = EPBA
NORMAL PROFITS

AR=OPEQ
AC=OPEQ
Profit=AR-AC
 LOSSES
AR=OPEQ
AC=OABQ
Profit=AR-AC
The rule says
that profit
maximization is
achieved when
marginal
revenue is equal
to marginal cost.
 Demand and marginal revenue for a perfect
competition firm:

• Demand curve for individual firm in

perfect competitive market would be
parallel to x-axis because price remains
same, but the output demanded
changes.
• Demand curve for the industry would be
a downward slopping curve.
THE
COMPETITIVE • The firm’s supply curve is the portion
of the marginal cost curve for which
FIRM’S SHORT‐ marginal cost is greater than average
RUN SUPPLY variable cost. The Short-Run Supply
Curve for a Competitive Firm In the
CURVE short run, the firm chooses its output
so that marginal cost MC is equal to
price if the firm covers its average
variable cost. The short-run supply
curve is given by the crosshatched
portion of the marginal cost curve.
Short-run supply curves for
competitive firms slope
upward because of increase
in marginal cost .As a result,
an increase in the market
price will induce those firms
already in the market to
increase the quantities they
produce. The higher price
not only makes, the
additional production
profitable, but also increases
the firm's total profit because
it applies to all units that the
firm produces.
 PRODUCER SURPLUS

• Producer surplus is the difference between the price firms

would have been willing to accept and the price they
actually receive. Graphically, producer surplus is the area
above the supply curve below the market price
• Also producer surplus only occurs in the short run in a perfectly
competitive market.
Graphical Representation of producer
surplus

PRICE=OPEQ
COST=OABQ
PRODUCER
SURPLUS=APEB
DIFFERENCE BETWEEN ECONOMIC
PROFIT AND PRODUCER SURPLUS

• What is the difference between economic profit and producer

surplus?
• While economic profit is the difference between total revenue and
total cost, producer surplus is the difference between total revenue
and total variable cost. The difference between economic profit
and producer surplus is the fixed cost of production.