Group Member

Zubair Javed Usman Afzal

FA10-MBA-121 FA10-MBA-091

A Perfectly Competitive Market

A Perfectly Competitive Market

A perfectly competitive market is one in which

economic forces operate unimpeded or not controlled.

A Perfectly Competitive Market

A perfectly competitive market must meet the

following requirements:

Both buyers and sellers are price takers. The number of firms is large. There are no barriers to entry. The firms' products are identical. There is complete information. Firms are profit maximizers.

The Necessary Conditions for Perfect Competition

Both buyers and sellers are price takers. A price taker is a firm or individual who takes the market price as given. In most markets, households are price takers they accept the price offered in stores.

The Necessary Conditions for Perfect Competition

The number of firms is large.

Large means that what one firm does has no bearing on what other firms do. Any one firm's output is minuscule when compared with the total market.

The Necessary Conditions for Perfect Competition

There are no barriers to entry.

Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market. Barriers sometimes take the form of patents granted to produce a certain good.

The Necessary Conditions for Perfect Competition

The firms' products are identical.

This requirement means that each firm's output is indistinguishable from any competitor's product.

The Necessary Conditions for Perfect Competition

There is complete information.

Firms and consumers know all there is to know about the market prices, products, and available technology. Any technological advancement would be instantly known to all in the market.

The Necessary Conditions for Perfect Competition

Firms are profit maximizers.

The goal of all firms in a perfectly competitive market is profit and only profit. Firm owners receive only profit as compensation, not salaries.

The Revenue of a Firm

Total revenue for a firm is the selling price times the

quantity sold. TR = (P Q)

The Revenue of a Firm

Average revenue tells us how much revenue a firm

receives for the typical unit sold. Average revenue is total revenue divided by the quantity sold.

The Revenue of a Firm

In perfect competition, average revenue equals the

price of the good.

Average Revenue = TR / Q

= Price

The Revenue of a Firm

Marginal revenue is the change in total revenue from

an additional unit sold. MR =TR/ Q

For competitive firms, marginal revenue equals the

price of the good.

The Revenue of a Firm

Marginal cost (MC) the change in total cost associated

with a change in quantity. MC = TC / Q

Market Demand Versus Individual Firm Demand Curve

Market Price $10 8 Market supply Price $10 8 Firm

6
4 2 0 Market demand

6
4 2 0 10

Individual firm demand

1,000

3,000 Quantity

20

30

Quantity

Profit-Maximizing Level of Output

The goal of the firm is to maximize profits.
When it decides what quantity to produce it

continually asks how changes in quantity affect profit.

Profit-Maximizing Level of Output

Since profit is the difference between total revenue

and total cost, what happens to profit in response to a change in output is determined by marginal revenue (MR) and marginal cost (MC).

A firm maximizes profit when MC = MR.

How to Maximize Profit

To maximize profits, a firm should produce where

marginal cost equals marginal revenue.

The Marginal Cost Curve Is the Supply Curve

The marginal cost curve is the firm's supply curve

above the point where price exceeds average variable cost.

The Marginal Cost Curve Is the Firms Supply Curve

$70 60
Cost, Price

Marginal cost
C

50
40 A B

30 20
10 0 1 2 3 4 5 6 7 8 9 10 Quantity

Determining Profits Graphically

MC MC MC Price Price Price 65 65 65 60 60 60 55 55 55 ATC 50 50 50 ATC 45 45 45 40 40 D A P = MR 40 P = MR Loss 35 35 35 P = MR Profit 30 30 30 B ATC AVC 25 25 C 25 AVC AVC E 20 20 20 15 15 15 10 10 10 5 5 5 0 0 0 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 Quantity Quantity Quantity (b) Zero profit case (a) Profit case (c) Loss case
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

Zero Profit or Loss Where MC=MR

Firms can also earn zero profit or even a loss where MC

= MR.

The Shutdown Point in short run

The firm will shut down if it cannot cover average

variable costs. Shut down = TR VC

The Shutdown Point in long run

The firm will shut down if it cannot cover total variable

costs. Shut down = TR TC

The Shutdown Point in run

MC Price 60 50 40 30 20 $17.80 A 10 Loss

long

ATC

P = MR AVC

8 Quantity