PERFECT

PERFECT
COMPETITION
COMPETITION
GROUP 1
 Our
Our Principal
Principal Team
Team

M
RAFA M RANDY
M IRHAM M LUTFI ALFARIDZ
NAUFAL N
(2304870) (2305719) I
(2304892) (2305061)
(2305892)
 Our
Our Principal
Principal Team
Team

FARIDA N DITA N NADIA Z AZKA A NAURA Z

(2303840) (2304003) (2305250) (2304209) (2304303)

ROSALIN
NADIFA N ERIKA N NABILA N ALYA N.A
DA
(2304373) (2305213) (2305359) (2305558)
(2305639)
 Table
Table of
of contents
contents
4 MARKET PROFIT IN PERFECT
11 STRUCTURE 44 COMPETITION IN THE
SHORT
Marginal RUN & Demand Curve
Variables
CHARARCTERISTIC
SHUTDOWN IN THE
22 OF MARKET 55 SHORT-RUN
STRUCTURE
Marginal Cost & Supply
DEFINITION &
CHARACTERISTICS ENTRY & ESIST DECISION IN
33 OF PERFECT 66 THE LONG RUN
COMPETITION
EFFICIENCY IN
PERFECTLY
77 COMPETITIVE
MARKET
1 4 MARKET STRUCTURE
 44 MARKET
MARKET STRUCTURE
STRUCTURE

1 2 3 4
Perfect Monopolistics
Oligopoly Monopoly
Competition Competition
1 Perfect Competition

Perfect competition describes a type of market structure

where a large number of small firms compete against
each other. In this scenario, a single firm does not have
any significant market share or market power
 44 MARKET
MARKET STRUCTURE
STRUCTURE

1 2 3 4
Perfect Monopolistics
Oligopoly Monopoly
Competition Competition
 Monopolistics
2 Competition

Monopolistic competition also refers to a type of market

structure where a large number of small firms compete
against each other. However, unlike in perfect
competition, the firms in monopolistic competition sell
similar but slightly differentiated products.
 44 MARKET
MARKET STRUCTURE
STRUCTURE

1 2 3 4
Perfect Monopolistics
Oligopoly Monopoly
Competition Competition
3 Perfect Competition

Oligopoly describes a market structure that is

dominated by only a small number of firms that serve
many buyers
 44 MARKET
MARKET STRUCTURE
STRUCTURE

1 2 3 4
Perfect Monopolistics
Oligopoly Monopoly
Competition Competition
4 Monopoly

Monopoly refers to a type of market structure where a

single firm controls the entire market. In this scenario,
the firm has the highest level of market power, as it
supplies the entire demand curve and consumers do not
have any alternatives.
Main
Main Characteristic
Characteristic of
of Market
Market
Structure
Structure 2
 Main
Main Characteristic
Characteristic of
of Market
Market Structure
Structure

The main characteristics that determine a market structure are:

• the number of organizations in the market (selling and buying)
• their relative negotiation power in relation to the price setting
• the degree of concentration among them
• the level product of differentiation and uniqueness
• the entry and exit barriers in a particular market.

So, the structure of the market affects how firm price and supply their
goods and services, the entry and exit barriers, and how efficiently a
seller carries out its business operations.
 MAIN
MAINCHARACTERISTICS
CHARACTERISTICSOF
OFSTRUCTURE
STRUCTUREMARKET
MARKET

Perfect Competition

The market is characterized by the following aspects:

• All sellers offer an identical product
• Sellers can’t affect the price
• Sellers have a relatively small market share
• Buyers know the nature of the product being sold and the prices charged by
each firm
• The industry is characterized by freedom of entry and exit (no barriers)
 MAIN
MAINCHARACTERISTICS
CHARACTERISTICSOF
OFSTRUCTURE
STRUCTUREMARKET
MARKET

Monopolistic Competition

Important characteristics are:

• Monopolistic competition occurs when an industry has many
firms offering products that are similar but not identical
• Unlike a monopoly, these firms have little power to set curtail
supply or raise prices to increase profits
• Firms in monopolistic competition typically try to
differentiate their product in order to achieve in order to
capture above market returns
• Heavy advertising and marketing is common among firms in
monopolistic competition and some economists criticize this
as wasteful
 MAIN
MAINCHARACTERISTICS
CHARACTERISTICSOF
OFSTRUCTURE
STRUCTUREMARKET
MARKET

Monopoly

Represents the opposite of a perfect competition.

This market is composed of a single seller who will therefore
in full control to set the prices.
 MAIN
MAINCHARACTERISTICS
CHARACTERISTICSOF
OFSTRUCTURE
STRUCTUREMARKET
MARKET

Oligopoly
Important characteristics are:
• A limited number of sellers collude, either explicitly or
silently, to limit output and/or fix prices, so as to realize
above normal market revenues
• Economic, legal, and technological factors can contribute to
the formation and maintenance, or dissolution, of oligopolies
• The major difficulty that oligopolies face is the prisoner's
dilemma that each member faces, which encourages each
member to cheat
• Government policy influence oligopolistic behaviour, and
sellers in mixed economies often seek government support
for ways to limit competition
 3
Definition
Definition and
and Characteristics
Characteristics of
of Perfect
Perfect
Competition
Competition
 Definition
Definitionand
andCharacteristics
Characteristicsof
ofPerfect
PerfectCompetition
Competition

Definition

Perfect competition is a market structure characterized by a large

number of participants. It is defined by conditions such as perfect
information, free entry, and identical goods. In general equilibrium
theory, Debreu [1959] formalized perfect competition as each good
having a single price. Rational agents in this context act as price-
takers. Notably, the formal definition does not explicitly require a
large number of agents or free entry
 Definition
Definitionand
andCharacteristics
Characteristicsof
ofPerfect
PerfectCompetition
Competition

Characteristics

1. Large number of buyers and sellers

2. Homogenous product is produced by every firm
3. Free entry and exit of firms
4. Zero advertising cost
5. Consumers have perfect knowledge about the market and are well
aware of any changes in the market. Consumers indulge in rational
decision making.
 Definition
Definitionand
andCharacteristics
Characteristicsof
ofPerfect
PerfectCompetition
Competition

Characteristics
6. All the factors of production, viz. labour, capital, etc, have perfect mobility in the market and are not
hindered by any market factors or market forces.
7. No government intervention
8. No transportation costs
9. Each firm earns normal profits and no firms can earn super-normal profits.
10. Every firm is a price taker. It takes the price as decided by the forces of demand and supply. No firm
can influence the price of the product
 4
Profit
Profit in
in Perfect
Perfect Competition
Competition in
in the
the Short-run
Short-run
 MARGINAL
MARGINALVARIABLE
VARIABLE

Characteristics

Short‐run profit maximization. A firm maximizes its profits by

choosing to supply the level of output where its marginal revenue
equals its marginal cost. When marginal revenue exceeds marginal
cost, the firm can earn greater profits by increasing its output. When
marginal revenue is below marginal cost, the firm is losing money,
and consequently, it must reduce its output. Profits are therefore
maximized when the firm chooses the level of output where its
marginal revenue equals its marginal cost.
 DEMAND
DEMANDCURVE
CURVEFOR
FORINDIVIDUAL
INDIVIDUAL

• The demand curve for the Characteristics

market, which includes all firms, is downward
sloping, while the demand curve for the individual firm is flat or perfectly
elastic, reflecting the fact that the individual takes the market price, P, as
given.
• The difference in the slopes of the market demand curve and the individual
firm's demand curve is due to the assumption that each firm is small in size.
No matter how much output an individual firm provides, it will be unable to
affect the market price.
• Note that the individual firm's equilibrium quantity of output will be
completely determined by the amount of output the individual firm chooses
to supply.
DEMAND
DEMANDCURVE
CURVEFOR
FORINDIVIDUAL
INDIVIDUAL
 5
Shutdown
Shutdown In
In the
the Short
Short Run
Run
 SHUTDOWN
SHUTDOWNIN
INTHE
THESHORT
SHORTRUN
RUN

Shutdown is a temporary phenomenon where the firm stays in the

Characteristics
business but could stop production for a while until market
conditions improve.

The shutdown rule: a firm should continue operations as long as

the price (average revenue) is able to cover average variable costs.

A shutdown point is an operating level where a business does not

benefit in continuing production operations in the short run.
 SHUTDOWN
SHUTDOWNIN
INTHE
THESHORT
SHORTRUN
RUN

SDP: P = If P > AVC but P < ATC, then the firm

AVC Characteristics continues to produce in the short-run,
*Firm indifferent between producing in the short run or not. Just covers variable
making economic losses. Firm covers
cost.
variable cost and some but not all of
fixed cost

If P < AVC, then the firm stops

producing as the price is not sufficient
enough to cover the variable cost and
the firm incurs its fixed costs.

The firm's short‐run supply curve is

the portion of the marginal cost
curve labeled ef.
 SHUTDOWN
SHUTDOWNIN
INTHE
THESHORT
SHORTRUN
RUN

EXAMPLE:
A pizza store that has signed a lease to pay rent of $10,000 per month. Assume that they will sell
2,000 pizzas per month if they are open and pay variable costs of $15,000. This means that our
total cost is $25,000.
Using our earlier values, this means that:

Shutdown Possibilities:
 6
Entry
Entry &
& Exist
Exist Decision
Decision in
in the
the Long
Long Run
Run
 Entry
Entry&&Exist
ExistDecision
Decisionin
inthe
theLong
LongRun
Run

Characteristics
In the long run, perfectly competitive firms will react to profits by
increasing production. They will respond to losses by reducing
production or exiting the market. Ultimately, a long-run equilibrium
will be attained when no new firms want to enter the market and
existing firms do not want to leave the market since economic profits
have been driven down to zero.
 7

Effeciency
Effeciency in
in Perfectly
Perfectly Competitive
Competitive Market
Market
 Effeciency
Effeciencyin
inPerfectly
PerfectlyCompetitive
CompetitiveMarket
Market

In the long run, perfectly competitive firms will react to profits by

increasing production. They will respond to losses by reducing
production or exiting theCharacteristics
market. Ultimately, a long-run equilibrium
will be attained when no new firms want to enter the market and
existing firms do not want to leave the market since economic profits
have been driven down to zero.
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