In This Lecture…
 Concept of Perfect
Competition Market
 Features of Perfectly
Competition Market
 Conditions of ShortR...
Market Structure
The particular environment of a firm, the
characteristics of which influence the
firm’s pricing and outpu...
The Theory of Perfect Competition
A theory of market structure based on four
assumptions:
(1)There are many buyers and sel...
A Perfectly Competitive Firm is a
Price Taker
A seller in perfect competition market does
not have the ability to control ...
Market Demand Curve and Firm
Demand Curve in Perfect Competition

 The market, composed of all buyers and sellers,
establ...
Quantity of Output the Perfectly
Competitive Firm Will Produce
The firm’s demand
curve is horizontal
at the equilibrium
pr...
Profit-Maximization Rule
Profit is maximized by producing the
quantity of output at which MR = MC.
For Perfect Competition...
Resource Allocative Efficiency
 Producing a good—any good—until price
equals marginal cost ensures that all units of the
...
Profit Maximization
and Loss Minimization
for the Perfectly
Competitive Firm:
Three Cases I

 In Case 1, TR TC and
the fi...
Profit Maximization
and Loss Minimization
for the Perfectly
Competitive Firm:
Three Cases II
 In Case 2, TR < TC and
the ...
Profit Maximization
and Loss Minimization
for the Perfectly
Competitive Firm:
Three Cases III
 In Case 3, TR < TC and
the...
What Should a Perfectly Competitive
Firm Do in the Short Run?

 The firm should produce in the short run as long
as price...
The Perfectly Competitive Firm’s
Short-Run Supply Curve
The short-run
supply curve is that
portion of the firm’s
marginal ...
Long-Run Equilibrium
Long-run competitive equilibrium
exists when:
there is no incentive for firms to
enter or exit the i...
Productive Efficiency
 The situation that exists when a firm
produces its output at the lowest possible
per-unit cost (lo...
Long-Run Competitive
Equilibrium
 The condition where:
P = MC = SRATC = LRATC.
 There are zero economic profits, firms a...
Long-Run Competitive Equilibrium in the
Market and the Firm

P = MC (the firm has no incentive to move away from the quant...
Next
11 perfect competition class economics slides for ku
11 perfect competition class economics slides for ku
Upcoming SlideShare
Loading in …5
×

11 perfect competition class economics slides for ku

1,060 views

Published on

this would be helpful for KU students.economics slides for Tu and KU students.

Published in: Education, Business, Technology
0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,060
On SlideShare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
38
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

11 perfect competition class economics slides for ku

  1. 1. In This Lecture…  Concept of Perfect Competition Market  Features of Perfectly Competition Market  Conditions of ShortRun and Long-Run Competitive Equilibrium
  2. 2. Market Structure The particular environment of a firm, the characteristics of which influence the firm’s pricing and output decisions.
  3. 3. The Theory of Perfect Competition A theory of market structure based on four assumptions: (1)There are many buyers and sellers (2)Each firm produces and sells a homogeneous product. (3)Buyers and sellers have perfect knowledge about the market i.e. all relevant information with respect to prices, product quality, sources of supply, and so on. (4)There is free or easy entry and exit from the industry.
  4. 4. A Perfectly Competitive Firm is a Price Taker A seller in perfect competition market does not have the ability to control the price of the product it sells; it takes the price determined in the market by the market demand and market supply forces. In Perfect Competition market P=AR=MR=d
  5. 5. Market Demand Curve and Firm Demand Curve in Perfect Competition  The market, composed of all buyers and sellers, establishes the equilibrium price. (a)  A single perfectly competitive firm then faces a horizontal (flat, perfectly elastic) demand curve. (b)
  6. 6. Quantity of Output the Perfectly Competitive Firm Will Produce The firm’s demand curve is horizontal at the equilibrium price. Its demand curve is its marginal revenue curve. The firm produces that quantity of output at which MR = MC.
  7. 7. Profit-Maximization Rule Profit is maximized by producing the quantity of output at which MR = MC. For Perfect Competition, profit is maximized when P = MR = MC* * This condition is unique for perfect competition and does not hold for other market structures.
  8. 8. Resource Allocative Efficiency  Producing a good—any good—until price equals marginal cost ensures that all units of the good are produced that are of greater value to buyers than the alternative goods that might have been produced.  A firm that produces the quantity of output at which price equals marginal cost (P = MC) is said to exhibit resource allocative efficiency.  For a perfectly competitive firm, profit maximization and resource allocative efficiency are not at odds.
  9. 9. Profit Maximization and Loss Minimization for the Perfectly Competitive Firm: Three Cases I  In Case 1, TR TC and the firm earns profits.  It continues to produce in the short run.
  10. 10. Profit Maximization and Loss Minimization for the Perfectly Competitive Firm: Three Cases II  In Case 2, TR < TC and the firm takes a loss.  It shuts down in the short run because it minimizes its losses by doing so; it is better to lose $400 in fixed costs than to take a loss of $450.
  11. 11. Profit Maximization and Loss Minimization for the Perfectly Competitive Firm: Three Cases III  In Case 3, TR < TC and the firm takes a loss.  It continues to produce in the short run because it minimizes its losses by doing so; it is better to lose $80 by producing than to lose $400 in fixed costs by not producing.
  12. 12. What Should a Perfectly Competitive Firm Do in the Short Run?  The firm should produce in the short run as long as price (P) is above average variable cost (AVC).  It should shut down in the short run if price is below average variable cost.
  13. 13. The Perfectly Competitive Firm’s Short-Run Supply Curve The short-run supply curve is that portion of the firm’s marginal cost curve that lies above the average variable cost curve.
  14. 14. Long-Run Equilibrium Long-run competitive equilibrium exists when: there is no incentive for firms to enter or exit the industry, there is no incentive for firms to produce more or less output, and there is no incentive for firms to change plant size.
  15. 15. Productive Efficiency  The situation that exists when a firm produces its output at the lowest possible per-unit cost (lowest ATC).  The perfectly competitive firm does this in the long-run.
  16. 16. Long-Run Competitive Equilibrium  The condition where: P = MC = SRATC = LRATC.  There are zero economic profits, firms are producing the quantity of output at which price is equal to marginal cost, and no firm has an incentive to change its plant size.
  17. 17. Long-Run Competitive Equilibrium in the Market and the Firm P = MC (the firm has no incentive to move away from the quantity of output at which this occurs, q1); P = SRATC (there is no incentive for firms to enter or exit the industry); and SRATC= LRATC (there is no incentive for the firm to change its plant size).
  18. 18. Next

×