Perfect competition


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Perfect competition

  1. 1. Perfect Competition JENNIE HARRINGTON
  2. 2. Assumptions underlying the theory of Perfect Competition There are many buyers in the industry  No individual buyer can influence, by his/her own actions the market price of the goods  Each individual firm is price taker  Each individual buyer acts independently There are many sellers in the industry  No individual seller can influence, by his/her own actions the market price of the goods  Each individual firm is a price taker  Each individual seller acts independently
  3. 3.  The goods are homogenous  The goods, which are supplied by the producers, are exactly the same/identical  Thus it pointless for the firms to advertise There is freedom of entry to and exit from the industry  Firms already in the industry cannot prevent new firms from entering the industry  No barriers to entry exist within the industry Perfect knowledge as to profits and prices  In the market everyone concerned has perfect knowledge as to profits made by other firms in the industry  Consumers are fully aware of the prices being charged for the products Each firm tries to maximise profits  The aim of each firm is to produce that quantity where MC = MR
  4. 4.  Firms face a perfectly elastic supply of factors of production  If a firm wants to increase output it can do so and acquire the necessary f.o.p’s at the existing price I.e. a scarcity of f.o.p’s will not develop thereby pushing up their price No collusion exists on the market  No collusion exists between buyers of the good or sellers of the good. Buyers do not group together with other buyers and sellers do no group together with other sellers in order to influence the price at which the good is sold
  5. 5. Explain the concept of a price takerThis means that the individual firm must accept the price as it is set on the market. Each firm supplies such a tiny fraction of the market it cannot influence the market price
  6. 6. Shor t Run Perfect Competition diagram P MC ACP1 E AR = MR = D Q1 Q
  7. 7. Short run perfect competition explanation  Equilibrium occurs at Practice your point _, where MC = MR diagram here.. and MC is rising  Price/ output  The firm produces output Q1  The firm sells at price P1  Profits  The firm is earning SNP’s I.e. AR>AC  Costs  The firm’s costs are at point _
  8. 8. Impact which the entry of new firms will have on the market S1 S2  Due to perfect knowledgeP of profits and the freedom of entry and exit in the market, new firms enter the market.P1  The supply curve for the market shifts to the right from S1 to S2 and the marketP2 price falls.  Firms will now produce a smaller quantity. D  Amount of SNP’s will fall/ be Q eliminated
  9. 9. Long Run Perfect Competition diagram P MC ACP1 AR = MR = DP2 AR = MR = D E Q2 Q
  10. 10. Long run equilibrium in Perfect Competition Practice your LR diagram.. And fill in the blanks  Equilibrium occurs at __, where _________  Price/output: The firm produces output __ and sells at price ___  Profits: The firm is making normal profit where AR __AC  Costs: The firms costs are at point _, most efficient point on the AC curve.
  11. 11. Firms in PC tend not to engage in advertising because of: Homogeneous goods  Because the goods are identical, and no differences exist, then there is no point in advertising Increased costs/no additional revenue  If a firm did advertise it would increase its own costs and decrease is profits.. It would gain no additional revenue for itself Benefits the entire industry  Advertising by a single firm would not just benefit this firm but the entire industry
  12. 12. Supply curve of a firm in perfect competition short runP  Theshort run supply MC curve of a firm in perfect competition is that part AVC of the marginal cost curve above AVC Q
  13. 13. Supply curve of a firm in perfect competition long runP  The long run supply MC curve of a firm in perfect competition is that part AC of the marginal cost curve above AC Q
  14. 14. Why does perfect competition benefit consumers?Consumers pay the lowest price for the good since the firm produces at the minimum price on the average cost curve  Maximum efficiency: lowest point on the AC curve  No SNP’s exist in the long runNo competitive advertising undertaken in perfect competition
  15. 15. Why does perfect competition benefit the economy?Only the most efficient firms survive, since any firms whose costs are such that AC>AR will be forced out of the industry in the long run. It must use its resources efficientlyNo barriers to entry exist which could have the effect of reducing competition or distorting the market