Revision presentation on perfectly competitive markets

1. A2 Micro: Market Structures
Perfect Competition

2. What is Perfect Competition? HALFPPP
• Homogenous Products (all perfect substitutes)
• All firms have access to factors of production
• Large number of buyers & sellers
• Free entry and exit to/from the market
• Perfectly elastic demand curve
• Perfect knowledge / information
• Profit maximization assumed as key objective

3. Price,
Cost
Output
Price,
Cost
Output
Market Supply and
Demand
Revenues, Costs and Profits for a
Competitive Firm
D
S
AC
MC
P
1
AR=MR
Equilibrium price and output under perfect competition
Price and Output

4. Price,
Cost
Output
Price,
Cost
Output
Market Supply and
Demand
Revenues, Costs and Profits for a
Competitive Firm
D
S
AC
MC
P
1
AR=MR
Equilibrium price and output under perfect competition
Price and Output

5. Price,
Cost
Output
Price,
Cost
Output
Market Supply and
Demand
Revenues, Costs and Profits for a
Competitive Firm
D
S
AC
MC
P
1
AR=MR
Q1
C1
Supernormal
profits
Equilibrium price and output under perfect competition
Price and Output

6. Perfect Competition Multiple Choice Question

7. Perfect Competition and the Shut Down Price

8. Monopolistic Competition Multiple Choice
Question

9. Price,
Cost
Output
Price,
Cost
Output
Market Supply and
Demand
Revenues, Costs and Profits for a
Competitive Firm
D
S1
AC
MC
P
1
AR1=MR1
S2
P
2
The entry of new firms into a competitive market
Price and Output in the Long Run

10. Price,
Cost
Output
Price,
Cost
Output
Market Supply and
Demand
Revenues, Costs and Profits for a
Competitive Firm
D
S1
AC
MC
P
1
AR1=MR1
Q2
AR2=MR2
S2
P
2
The entry of new firms into a competitive market
Price and Output in the long run

11. Allocative Productive Dynamic
Price = marginal cost
Producing at the lowest
point of the
average cost curve
Changes in the
choices available in a
market over time
Economic Efficiency – Vitally Important in A2 Micro!
Perfect competition and economic efficiency

12. Price,
Cost
Output
Price,
Cost
Output
Market Supply and
Demand
Revenues, Costs and Profits for a
Competitive Firm
D
S1
AC
MC
Q2
AR2=MR2
S2
P
2
The entry of new firms into a competitive market
Price and Output in the long run

13. Problems with the (theoretical) model of perfect competition
• Most firms have some amount of price-setting power
• Dominance of differentiated / branded products
• Highly complex products, always information gaps
• Impossible to avoid search costs even with digital
technology
• Patents, control of intellectual property, control of key
inputs are all ignored by the competitive model
• Rare for entry and exit in an industry to be costless
Evaluation

14. Evaluation

15. A2 Micro: Perfect Competition