Governor Felicisimo T. San Luis National Agro-Industrial HS Empowerment Technology Impact of Business on the Community: Efficiency in Perfectly Competitive Markets and Impact of Business on the Community: Market Failure

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14. What Is Perfect Competition?
The term perfect competition refers to a theoretical
market structure. In a perfect competition model,
there are no monopolies. This kind of structure has a
number of key characteristics, including:

15. • Many buyers and sellers.
• No barriers to entry.
• Perfect knowledge of prices and value.
• Identical products.
• All products are equal value.
• No seller has market power.

18. A perfectly competitive firm is known as a price
taker because the pressure of competing firms
forces them to accept the prevailing equilibrium
price in the market. If a firm in a perfectly
competitive market raises the price of its product by
so much as a coin, it will lose all of its sales to
competitors.

19. Firms are said to be in perfect competition when the
following conditions occur:
• Many firms produce identical products.
• Many buyers are available to buy the product, and
many sellers are available to sell the product.
• Sellers and buyers have all relevant information to
make rational decisions about the product being
bought and sold.
Perfect competition and why it matters

20. Firms are said to be in perfect competition when the
following conditions occur:
• Firms can enter and leave the market without any
restrictions—in other words, there is free entry
and exit into and out of the market.

22. In perfect competition, each firm produces at a
point where price (P) equals marginal revenue (MR)
and average revenue (AR). As seen before, each firm
does not make any economic profit in the long run.
The quantity produced by each firm is also the point
where the average cost (AC) equals marginal cost
(MC).
Marginal revenue is the money a firm makes
for each additional sale.

23. In perfect competition, each firm produces at a
point where price (P) equals marginal revenue (MR)
and average revenue (AR). As seen before, each firm
does not make any economic profit in the long run.
The quantity produced by each firm is also the point
where the average cost (AC) equals marginal cost
(MC).
Average revenue is referred to as the revenue
that is earned per unit of output.

24. In perfect competition, each firm produces at a
point where price (P) equals marginal revenue (MR)
and average revenue (AR). As seen before, each firm
does not make any economic profit in the long run.
The quantity produced by each firm is also the point
where the average cost (AC) equals marginal cost
(MC).
Actual cost refers to the amount of money that was paid to
acquire a product or asset.

25. In perfect competition, each firm produces at a
point where price (P) equals marginal revenue (MR)
and average revenue (AR). As seen before, each firm
does not make any economic profit in the long run.
The quantity produced by each firm is also the point
where the average cost (AC) equals marginal cost
(MC).
Marginal cost refers to the additional cost to
produce each additional unit.

28. Productive efficiency means producing at the
lowest cost possible without any waste. The
quantity of output supplied is within the production
possibilities frontier.

29. Allocative efficiency means that among the points
on the production possibility frontier, the point that
is chosen is socially preferred. It means that
businesses supply what people demanded.

31. In that situation, the benefit to society as a whole of
producing additional goods, as measured by the
willingness of consumers to pay for marginal units of
a good, would be higher than the cost of the inputs
of labor and physical capital needed to produce the
marginal good.

32. How perfectly competitive firms make output decisions
A perfectly competitive firm has only one major
decision to make—what quantity to produce. To
understand why this is so, let's consider a different
way of writing out the basic definition of profit:

34. Determining the highest profit by comparing total
revenue and total cost
A perfectly competitive firm has only one major
decision to make—what quantity to produce. To
understand why this is so, let's consider a different
way of writing out the basic definition of profit:

35. A perfectly competitive firm can sell as large a quantity
as it wishes, as long as it accepts the prevailing market
price. If a firm increases the number of units sold at a
given price, then total revenue will increase. If the
price of the product increases for every unit sold, then
total revenue also increases.

36. To summarize what you have learned in the lesson,
answer the following questions:
1. What is productive efficiency? allocative efficiency?
2. What is the impact of the perfectly competitive
markets on society?

39. Productive efficiency means producing at the
lowest cost possible without any waste. The
quantity of output supplied is within the production
possibilities frontier.

40. Allocative efficiency means that among the points
on the production possibility frontier, the point that
is chosen is socially preferred. It means that
businesses supply what people demanded.

47. Market failure is the economic situation defined by
an inefficient distribution of goods and services in the
free market. In market failure, the individual incentives
for rational behavior do not lead to rational outcomes
for the group.

48. Prior to market failure, the supply and demand
within the market do not produce quantities of the
goods where the price reflects the marginal benefit
of consumption. The imbalance causes allocative
inefficiency, which is the over- or under-
consumption of the good.

49. Market failure occurs due to inefficiency in the
allocation of goods and services. In order to fully
understand market failure, it is important to
recognize the reasons why a market can fail. Due to
the structure of markets, it is impossible for them to
be perfect. These are the reasons for market failure:
Causes of Market Failure

50. 1. Positive and Negative Externalities
An externality is an effect on a third party that is
caused by the consumption or production of a
good or service. A positive externality is a positive
spillover that results from the consumption or
production of a good or service.

51. 1. Positive and Negative Externalities
An externality is an effect on a third party that is
caused by the consumption or production of a
good or service. A positive externality is a positive
spillover that results from the consumption or
production of a good or service. A negative
externality is a negative spillover effect on third
parties.

52. 1. Positive and Negative Externalities
An externality is an effect on a third party that is
caused by the consumption or production of a
good or service. A positive externality is a positive
spillover that results from the consumption or
production of a good or service. A negative
externality is a negative spillover effect on third
parties.

53. Market failure is the economic situation defined by an inefficient distribution of goods and services in the free
market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the
group.
Positive Externalities

54. Negative Externalities
Positive and Externalities

55. 2. Environmental Concerns
Effects on the environment as important
considerations as well as sustainable
development.

56. 3. Lack of Public Goods
The problem with public goods is that they have a
free-rider problem. This means that it is not
possible to prevent anyone from enjoying a good,
once it has been provided. Therefore there is no
incentive for people to pay for the good because
they can consume it without paying for it.

59. 4. The Underproduction of Merit Goods
A merit good is a private good that society
believes is under-consumed, often with positive
externalities. For example education, healthcare,
and sports centers.

61. 5. Overprovision of Demerit Goods
A demerit good is a private good that society
believes is over consumed, often with negative
externalities. For example cigarettes, alcohol, and
prostitution.

63. 6. Abuse of Monopoly Power
Imperfect markets restrict output in an attempt
to maximize profit

65. Government Interventions for the Market Failure
When a market fails, the government usually
intervenes depending on the reason for the failure.
Below are the following government interventions to
address market failures.

66. 1. Legislation – enacting specific laws. For example,
banning smoking in restaurants, or making high
school attendance mandatory.

67. 1. Legislation – enacting specific laws. For example,
banning smoking in restaurants, or making high
school attendance mandatory.

68. 2. Direct provision of merit and public goods –
government controls the supply of goods that
have positive externalities. For example, by
supplying high amounts of education, parks, or
libraries.

70. 3. Taxation – placing taxes on certain goods to
discourage use and internalize external costs. For
example, placing a ‘sin tax’ on tobacco products,
and subsequently increasing the cost of tobacco
consumption.

71. 1. Legislation – enacting specific laws. For example,
banning smoking in restaurants, or making high
school attendance mandatory.

72. 4. Subsidies – reducing the price of a good based on
the public benefit that is gained. For example,
lowering college tuition because society benefits
from more educated workers. Subsidies are most
appropriate to encourage behavior that has
positive externalities.

74. 5. Tradable permits – permits that allow firms to
produce a certain amount of something,
commonly pollution. Tradable permits give the
holder the right to pollute a certain amount, to
buy permits if emissions increase, and to sell
permits if emissions decrease.

76. 6. Extension of property rights – creates
privatization for certain non-private goods like
lakes, rivers, and beaches to create a market for
pollution. Then, individuals get fined for polluting
certain areas.

78. 7. Advertising – encourages or discourages
consumption.

80. 8. International cooperation among governments –
governments work together on issues that affect
the future of the environment.

82. WRAP-UP
To summarize what you have learned in the lesson,
answer the following questions:
1. What is the market failure?
2. What are the causes of market failure?
3. What are the government interventions for
market failure?