Class: Economics20: Consumer Economics Sub Topic: - Pure Competition - Assumption of Profit Maximization - Comparison of total cost and total revenue - Comparison of marginal revenue and marginal cost

1. COMPETITION AMONG
THE MANY

2. Competition is part of human motivation. The
determination of output and price commodities and the
allocation of resources among various goods produced by
an economy depends not only on demand and cost
conditions but also on the market structure. Among the
many market models are pure competition, monopolistic
competition, pure monopoly, and oligopoly.

3. • A market situation in which there exists a
homogeneous product, freedom of entry and a
large number of buyers and sellers.
• A market is said to be purely competitive when it
has these five characteristics:
• Large numbers of sellers and buyers (Plurality)
• Standardized Product (Homogeneity)
• Perfect mobility of firms and resources (Mobility)
• Consumers, resource owners, and firms have full
knowledge of present and future prices and cost. (Full-
knowledge)
• No artificial obstacle (Free-entry and exit)
Market Structures: Competition Among the Many – Pure Competition

4. Homogeneity
Products are identical and consumers have no
preference among the sellers of the product. The object of
advertising is precisely to destroy homogeneity.
Plurality
Interdependence of decision-making among firms
becomes less important as the number of competitors increase.
Plurality is measured by its effect-that no one firm is big enough
to throw its weight around. The firm facing such a situation
merely looks at the prevailing market price and takes it as given.
“Price takers”
Market Structures: Competition Among the Many – Pure Competition

5. Free Entry
New firms are allowed to join in the production of the
commodity if they so wish or existing firms to cease production
should they so desire.
Mobility
Each one must be free to transfer from one place to
another, from one occupation to another, or from a particular
employment of a factor of production to another.
Full Knowledge
Full knowledge of all possible terms of sale or purchase is
another requirement of perfectly competitive market. The
dissemination of information regarding business terms is
therefore, an extremely important factor in the perfection of the
competitive process.
Market Structures: Competition Among the Many – Pure Competition

6. • No one is free from competition even if it is the only
producer of a certain variety of a good.
Market Structures: Competition Among the Many – Pure Competition

7. Product Price
Qty
Demanded
Total
Revenue
Average
Revenue
Marginal
Revenue
P 25 1 P25 P25 P25
25 2 50 25 25
25 3 75 25 25
25 4 100 25 25
25 5 125 25 25
Market Structures: Competition Among the Many – Pure Competition
Revenue Schedule Under Pure Competition
AR=
𝑇𝑅
𝑄𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
TR=Product Price x Qty Demanded
MR=
∆𝑇𝑅
∆𝑂𝑢𝑡𝑝𝑢𝑡
Number of revenue received by the firm
Always equal to price
Tells how many total
revenue received by the firm
>Always equal to price
Profit = Revenue - Cost

8. Assumption of Profit Maximization
There are two complementary approaches in determining
the level of output at which a firm will realize maximum
profits or minimum losses.
• Comparison of total cost and total revenue
• Comparison of marginal revenue and marginal cost
Market Structures: Competition Among the Many – Pure Competition

9. Quantity
Total
Fixed Cost
Total
Variable
Cost
Total Cost
Total
Revenue
Profit
0 P200 P0 P200 P0 P-200
2 200 180 380 262 -118
4 200 340 540 524 -16
6 200 480 680 786 106
8 200 600 800 1048 248
10 200 740 940 1310 370
12 200 900 1100 1572 472
14 200 1080 1280 1834 554
16 200 1300 1500 2096 596
18 200 1560 1760 2358 598
20 200 1860 2060 2620 560
Market Structures: Competition Among the Many – Pure Competition
Total Revenue-Total Cost Approach

10. Market Structures: Competition Among the Many – Pure Competition
Marginal Revenue-Marginal Cost Approach
Quantity P=MR
Total
Cost
Total
Revenue
MC AC
Profit/
Unit
Profit
0 131 P200 P0 0 0 0 P-200
2 131 380 262 90 190.00 P-59.00 -188
4 131 540 524 80 135.00 -4.00 -18
6 131 680 786 70 113.33 17.67 106
8 131 800 1048 60 100.00 31.00 248
10 131 940 1310 70 94.00 37.00 370
12 131 1100 1572 80 91.67 39.33 427
14 131 1280 1834 90 91.43 39.57 554
16 131 1500 2096 110 93.75 37.25 596
18 131 1760 2358 130 97.78 33.22 598
20 131 2060 2620 150 103.00 28.00 560
Marginal Cost=
∆𝑇𝐶
∆𝑄
Average Cost=
𝑇𝐶
𝑄
Profit per unit =
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡
𝑄

11. Break-even Point
The point at which revenues equal expenses.
Shutdown Point
A point at which the producer is forced to stop
production because of losses.
Market Structures: Competition Among the Many – Pure Competition

12. THANK YOU