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Bab7 perfect competition market
1. Perfect competition is characterized by many small firms and buyers, homogeneous products, free entry and exit, and perfect information. 2. Under perfect competition, firms are price takers and cannot influence the market price. They must sell at the going market price. 3. In the short run, a perfectly competitive firm will produce at the quantity where marginal revenue equals marginal cost to maximize profits. In the long run, firms will enter or exit the market until economic profits are driven down to zero.
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Bab7 perfect competition market
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- 2. Introduction In the previouschapter we have examined the production and the cost of producing goods and services.n But a firm’s decision on production depends on the characteristics of the service industry in whichthe firm is operating. In this chapter and next chapter, we will define different types of markets, their characteristics, their determination of equilibrium in the short run and long run and some of their unique charactristics. We will explain the meaning of a firm and its objectives.
- 3. Theory of aFirm • Definiton of a firm – Is an institution that buys or hires factors of production and organizes them to produce and sell goods and services – An independent unit which produces goods and services for sale. – A unit engaged in production with the objective of maximizing profits.
- 4. Objective of afirm – The main goal or abjective is profit maximization. Accounting profit vs Economic Profit Example : A firm’s total revenue is RM 50,000, the total explicit cost is RM 20,000 and total implicit cost is RM 10,000. Calculate the accounting profit and economic profit Total Profit = Total Revenue – Total Cost TP = TR - TC PA = TR – TC(total explicit cost) = 50,000 - 20,000 = RM 30,000 PE = TR – TC (Total explicit cost + Total implicit cost ) = 50,000 - (20,000 + 10,000) = RM 20,000
- 5. Equilibrium of afirm - Definition Implies the desirable level to attain under given condition A firm is in equilibrium when it earns maximum profit or minimum loses. has no tendency to increase or decrease output. Equilibrium output is the output level which gives maximum profit.
- 6. 4 graph TR/TC TR/TC Profit/ Loss Profit / Loss Quantity Quantity Quantity Quantity
- 7. Marginal Approach • Invovlesmarginal revenue and marginal cost • A firm is said to be in equilibrium when marginal revenueis equal to marginal cost. MARGINAL REVEUE = MARGINAL COST Cost / Revenue Cost / Revenue Quantity Quantity
- 8. • Both theperfect competition and imperfect competition markets give the same explanation on maximizing profit. The only difference in both market is the MR curve. • The relationship between MR and MC is as follows : i. MR > MC – A firm can increase its profits by increasing output ii. MR < MC – A firm can reduce its loses by decreasing output iii. MR = MC – Profit are at maximum
- 9. Market Structure Definiton • Definitionof a Market – An arrangement that facilitates the buying and selling of a product, service, factor of production, or future commitment. – Or in other words, a market is a place where the buyer and seller meet one another to transact business • Definition of Market Structure – The number and distribution size of buyers and sellers in the market for a particular goods and services. – An indication of the number buyers and sellers: their market shares the degree of product standardization and the ease of the market entry and exit. – Explain the power of a firm determine the market price.
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- 11. Market Form Characteristics Perfect Competition Monopolistic Competition Oligopoly Monopoly Numberof firms Large number Large Few One Type of product Homogenous Differentiated Homogenous or Differentiated Unique : no close substitute Control over price None Some Some Considerable Condition for entry Very easy Relatively easy Significant obstacles Blocked Price elasticity of demand Infinite Large Small Very Small Example Wheat, corn Food, clothing Automobile, ciggarettes Local fixed phone service electricity
- 12. Perfect Competition • Perfectcompetition is a market in which there are a large number of buyers and sellers, buying and selling identical products etc • Example of products in a perfect competition market are agricultural goods such as vegetable, fruits and others.
- 13. • Characteristics 1. Largenumber of buyers and sellers • An important featur of perfect competition is the existence of alarge number of buyers and sellers • The quantity of a single seller sells in a market so small compared to the overall industry. • Therefore no one can influence the market price of goods. • Thus, in perfect competition, firms are price takers because the individual sales volume is realtively small compared to market volume.
- 14. 2. Free entryand exit – There are no restriction on the entry of new firms to the industry or the exit of firms. – A new firm can easily enter into perfect competition market and exit it at any time it chooses. 3. Non-Price Competition – Sellers practice non-price competition such as advertising, free gifts, discount, after sales service and promotions when these sellers cannot compete among themselves using pricing strategies – The role of non-price competition is insignificant as many sellers sell the products at fixed price and furthermore the product is identical
- 15. 4. Homogenous – Allthe firms will sell identical or homogenous products – Buyers cannot differentiate products in the term of quality, packaging, colour and design – Hence, the firm cannot charge different prices for the same products in the market – Product which are similar in nature but different in terms of quality and packaging are not homogenous products.
- 16. 5. Perfect knowledgeof the market – All the sellers and buyers will have perfect knowledge of the market. – Sellers cannot influence buyers and similarly buyers cannot influence sellers. – Sellers must know the price charge by other sellers in the market and the buyers must know the price being charged by another sellers. – If any seller charges a higher price, the buyer will buy from different sellers
- 17. 6. Perfect mobilityof factors of production – Factors of production can freely move from one occupation to another from one place to another. – There is no barrier of movement. – The existence of perfect mobility will lead to existence of large sellers in the market.
- 18. 7. Absence oftransport cost – There should not be any transport costs between sellers. – It is assumed that various firms will work closely with each other so that transport costs are not incurred – If two identical products are at two different places, their prices will be different because of transport costs – Therfeore there will no transport cost.
- 19. • Price determinationin Perfect Competition
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- 21. Short run Equilibrium •The • Two Types – Total Approach – Marginal Approach
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