Competitive markets ppt @ bec doms bagalkot mba BY BABASAB PATIL

1. COMPETITIVE MARKETS
Microeconomics for Business

2. The Perfect Competition Model
 Sellers are price-takers
 Sellers do not behave strategically
 Entry into the market is free
 Buyers are price-takers

3. Market Structure
 Large number of buyers
 Large number of sellers, each with negligible market
share
 Homogeneous products
 Well informed buyers
 No barriers to entry
ε mkt
ε firm =
m

4. Short Run Equilibrium
 Short run market demand is less price elastic than
long run
 A fixed number of firms in the market
 Firms operating on their short run supply curves
 Market supply is sum of each firm’s supply

5. Market & Firm Equilibrium (SR)
Firm Market
SSR
£ £
MCSR
ACSR
P1 P1
C1
DSR
x1 Qty X1 Qty

6. Long Run Equilibrium
 Long run market demand is more price elastic than
short run
 Number of firms in the market is not fixed
 new firms can enter (attracted by economic profits)
 loss-making firms can leave
 Firms operating on their long run supply curves

7. Long Run Equilibrium
Assume that:
 All existing and potential new firms have access to
same technology and hence face the same costs
 Input prices remain constant regardless of number
of firms in the market: i.e. constant cost industry

8. Market & Firm Equilibrium (LR)
Firm Market
£ £
MCLR
ACLR
SLR
P* P*
DLR
x1 Qty X1 Qty

9. Increasing Cost Industry
 As number of firms in the industry increases, input
prices and hence long run average costs rise
 So long run market supply curve is upward sloping

10. Decreasing Cost Industry
 As number of firms in the industry increases, input
prices and hence long run average costs fall
 So long run market supply curve is downward
sloping

11. Efficiency of Competition