This document provides an overview of perfect competition in the context of the milk market. It defines key characteristics of perfect competition, including a large number of small producers/sellers, standardized/homogeneous products, price-taking behavior, free entry and exit, and lack of non-price competition. The document then analyzes how the milk market exhibits these characteristics, such as small individual farms, uniform milk quality, and farmers being price takers. It concludes that the milk market approximates perfect competition.

1. PERFECT COMPETITION
-Featuring Milk Market-
Subject: Microeconomic
Lecturer: Ms. Trần Thị Minh Ngọc
Date: August 10th, 2013
Group members:
Trần Nguyên Phương
Huỳnh Minh Quân
Nguyễn Quang Tuấn
Trương Ngọc Lan Thanh
Nguyễn Minh Nguyên

2. Contents
• Theory of Perfect
Competition
• Features of Milk
products

3. Theory: Definition
Perfect Competition (which is sometimes known as
“Pure Competition”) is a type of market
characterized by:
•A very large number of small producers or sellers,
•A standardized, homogeneous product
•The inability of individual sellers to influence price
•The free entry and exit of sellers in the market
unnecessary nonprice actions.

4. Theory: Definition
(1) Buyers and sellers are too numerous and too
small to have any degree of individual control over
prices
(2) All buyers and sellers seek to maximize their
profit (income)
(3) Buyers and seller can freely enter or leave the
market
(4) All buyers and sellers have access to information
regarding availability, prices, and quality of goods
being traded
(5) All goods of a particular nature are homogeneous,
hence substitutable for one another.

5. Theory: Getting to know
Generally, a perfectly competitive market exists
when every participant is a "price taker", and no
participant influences the price of the product it
buys or sells.

6. Theory: Getting to know
Specific characteristics may include:
• Infinite buyers and sellers – An infinite number of
consumers with the willingness and ability to buy the
product at a certain price, and infinite producers with the
willingness and ability to supply the product at a certain
price.
• Zero entry and exit barriers – A lack of entry and exit
barriers makes it extremely easy to enter or exit a
perfectly competitive market.
• Perfect factor mobility – In the long run factors of
production are perfectly mobile, allowing free long term
adjustments to changing market conditions.
• Perfect information - All consumers and producers are
assumed to have perfect knowledge of price, utility,
quality and production methods of products.

7. Theory: Getting to know
• Zero transaction costs - Buyers and sellers do not incur
costs in making an exchange of goods in a perfectly
competitive market.
• Profit maximization - Firms are assumed to sell where
marginal costs meet marginal revenue, where the most profit is
generated.
• Homogenous products - The qualities and characteristics
of a market good or service do not vary between different
suppliers.
• Non-increasing returns to scale - The lack of increasing
returns to scale (or economies of scale) ensures that there will
always be a sufficient number of firms in the industry.
• Property rights -Well defined property rights determine
what may be sold, as well as what rights are conferred on the
buyer.

8. Theory: Getting to know
Examples of markets in perfect competition are
extremely rare. Numerous markets in the retail,
service and agricultural sectors approach perfect
competition best. But, in the agricultural sector,
government support price programs distort the
market mechanism. Notwithstanding the lack of
good examples, this form of market is important
because of its.

9. Features of Milk Products
Q: Why Milk Market is considered as the Perfect Competition?
A: Because a Milk Market assumes:
•Infinite buyers and producers
•Buyers and sellers are well informed
•Even though there are exceptions in Milk identical (organic, 1%,
reduced fat etc.), different companies do not produce different
"types" of milk
•There are no major barriers preventing the free market to
enter/exit.

10. NUMBER OF FIRMS
• Theory
The very large number of
firms in perfect
competition implies that
each individual firm is
very small in comparison
to the total market. Indeed,
if one firm were to
become significantly large,
it would dominate the
market and competition
would be eliminated or at
least diminished.
• Feature
In the milk production
segment of agriculture,
farms are usually small.
They are especially small
compared to the size of the
entire market for milk.
Note that the milk
distributors are
occasionally large, but not
the productive farms.

11. STANDARDIZED PRODUCT
• Theory
The product in perfect
competition is said to be
standardized
(or homogeneous)=> It does
not make any difference to
customers which specific
firm sells the product: It is
absolutely identical. This is
the main distinction between
perfect competition and
monopolistic competition:
once some differences can
be recognized by customers,
firms acquire power over
these customers.
• Feature
Milk is a uniform and
homogeneous product. It is
not possible to make a
distinction between the milk
of one farm and another. The
government has indeed set
standards of quality, fat
content and cleanliness.

12. PRICE TAKER
• Theory
The firms in perfect
competition have no power
over price: they have to sell at
the going market price. The
firms in perfect competition are
said to be price takers. Should
a firm attempt to raise the price
by the smallest possible
amount, customers would not
buy from it because they could
buy the same product from
other firms. Lowering the price
is also not necessary because
the firm can already sell all its
output at the going price.
• Feature
A milk producer who would try
to raise his/her revenues by
increasing the price for milk,
would find the company
collecting the milk in that
region unwilling to buy his/her
milk any longer. One
individual farmer is thus
unable to affect the price of
milk in the entire market.

13. ENTRY AND EXIT
• ENTRY
Should demand be above the minimum of average total cost, pure
profit would exist for firms in perfect competition. This profit
would attract new firms to the industry. Such entry of new firms
is not impeded by any entry barriers in industries in perfect
competition. The new firms would increase the total market
supply and drive the price down. The lower price pushes the
demand for each firm down toward or even below the
equilibrium minimum average total cost point.
• EXIT
Should the demand be below the minimum of average total cost,
losses of firms would force some firms to leave the industry. As
firms leave, a decreasing total supply pushes price back up. The
increasing price lifts the demand curves for individual firms
upward toward or even above the equilibrium point. Firms
departure or entry will continue until the price settles to be just
equal to minimum average cost.

14. NON-PRICE ACTION
• Theory
Non-price actions such as
advertising, service after sale
or warranty, are not
necessary in perfect
competition because the firm
can already sell all its output
at the going price, and
incurring additional expense
would only make it
unprofitable (Non-price
action for the entire industry
may however be useful).
• Feature
A single milk producer
cannot possibly influence
the consumption of milk at
large, and needs not
advertise. An association of
milk producers or a large
milk distributor may,
however, be in a position to
use advertisement
effectively.

15. DEMAND
• Theory
The demand of firms in
perfect competition is
perfectly elastic
(i.e., the smallest possible
price change results in a
virtually infinite quantity
change). Such demand is
represented graphically by a
horizontal demand curve: no
matter what quantity is sold,
the price is the same, and it
is the going price in the
market.
• Feature
Nationwide, the demand for
milk is likely to be down-sloping,
that is inversely
related to price. But for a
single milk producer, it is
given by the price the farmer
can receive: the going
market price. It does not
change, no matter what
quantity the farmer
produces. Thus demand is
horizontal.

16. PERFECT COMPETITION
DEMAND

17. PROFIT MAXIMIZATION & LOSS
MAXIMIZATION
• A firm must seek to sell a volume of output
where its total revenue exceeds its total cost by
the largest amount possible; that is, its profit is
the maximum.
• If a firm fails to derive a profit, it may
nevertheless seek, in the short run, to produce at
that level of sales where the difference between
its cost and its revenue, i.e., its loss, is minimum.

18. CLOSE DOWN DECISION &
BREAK-EVEN POINT
• CLOSE DOWN DECISION
If a firm has revenues that are insufficient to
cover even its fixed costs in the short run, the
firm must close down.
• BREAK-EVEN POINT
The volume of output where total revenue is
equal to total cost is known as the break-even
point. A firm must be beyond its break-even
point in order to be maximizing its profit.

19. MARGINAL REVENUE
MARGINAL COST RULE
• MARGINAL REVENUE, MARGINAL COST RULE
Producing at the level of output where marginal revenue equals
marginal cost is equivalent to profit maximization. Indeed, if
one less unit were to be produced, profit would be smaller by the
excess of marginal revenue over marginal cost for that last
unit. If one more unit were to be produced, profit would also be
smaller, this time by the excess of marginal cost over marginal
revenue.
MR = Change in total revenue/ one unit change in output
• MARGINAL REVENUE, MARGINAL COST
The marginal revenue = marginal cost rule is applicable to loss
minimization as well as profit maximization. However, if
marginal revenue intersects marginal cost below average variable
cost, it means that revenues are not sufficient to cover fixed costs
and the firm should close down.

20. MAXIMUM PROFIT
• MAXIMUM PROFIT
The maximum profit is obtained by first determining the level
of output for which marginal revenue equals marginal cost (thus
profits cannot possibly be increased). Then determining:
1- total revenue given by price multiplied by quantity
2- total cost given by average total cost multiplied by quantity
3- the difference between 1 and 2 above is the profit (or loss).
• MAXIMUM PROFIT GRAPH
Since maximum profit is the excess of total revenue over total
cost, it is shown graphically as the area by which the total
revenue rectangle exceeds the total cost rectangle. The height of
total revenue rectangle is the price received by the firm, and the
width is the optimum quantity (where MR=MC). The height of
total cost rectangle is average total cost (on ATC curve), and the
width is the optimum quantity.

21. MAXIMUM PROFIT GRAPH

22. SUPPLY CURVE
• SHORT RUN SUPPLY CURVE
The short run supply curve of firms in perfect competition is the
up-sloping portion of the marginal cost curve (above the average
variable cost intersection). Indeed, a firm determines its optimum
volume of sales by taking the intersection of marginal revenue
and marginal cost. The marginal revenue is also the price it
receives. Thus supplier's price-quantity combinations are given
by the marginal cost up-sloping portion.
• LONG RUN SUPPLY CURVE
The long run supply curve for an industry in perfect competition
is perfectly elastic (that is horizontal) in constant-cost industries
and up-sloping in increasing-cost industries. Whether an industry
is constant-cost or increasing-cost is determined by the presence
of adequate or insufficient resources.

23. LONG RUN PERFECT
EQUILIBRIUM
The long run equilibrium for firms in perfect
competition is where demand (and marginal
revenue which is identical to it) is tangent to the
minimum of average total cost (where marginal
cost also intersects average total cost). At that
point, there is no profit or loss for the firm. (Note
that there is no pure or economic profit, but
normal profit must still be covered).

24. ECONOMIC EFFECT &
PRODUCTIVE EFFICIENCY
• PERFECT COMPETITION ECONOMIC EFFECT
Perfect competition is seen as an ideal or optimum form of
market because of its very beneficial economic effect for
society, which comes from
- allocative efficiency, and
- productive efficiency.
But there are a few shortcomings nevertheless.
• PRODUCTIVE EFFICIENCY
The productive efficiency of perfect competition can be
observed
in the long run equilibrium point of all firms in the industry,
which is at the minimum of average total cost. This means that
all firms are forced to cut their costs and utilize the best
available technology in order to have their minimum average
total cost no higher than that of all the other firms in the
industry. There is also no under or over utilized capacity.

25. ALLOCATIVE EFFICIENCY &
SHORTCOMINGS
• ALLOCATIVE EFFICIENCY
The allocative efficiency in perfect competition comes from the
fact that the quantity produced by each firm is just that for
which the price paid by society is equal to the cost of
additional resources (marginal cost). More could not possibly
be obtained for a lower price. The resources are also the most
efficiently allocated among industries since firms will bid for
these resources up to the price consumers want to pay for them.
• PERFECT COMPETITION SHORTCOMINGS
In spite of its beneficial economic effect, perfect competition
fails to
- provide any correction for income distribution inequity,
- generate any public goods since there is not profit,
- stimulate technological progress because of lack of profits,
- offer diversity in products since these are standardized.

26. SUMMARY
As mentioned above, the perfect competition model,
if interpreted as applying also to short-period or
very-short-period behavior, is approximated only by
markets of homogeneous products produced and
purchased by very many sellers and buyers, usually
organized markets for agricultural products or raw
materials.
In real-world markets, assumptions such as perfect
information cannot be verified and are only
approximated in organized double-auction markets
where most agents wait and observe the behavior of
prices before deciding to exchange.

27. REFERENCES
• http://www.businessdictionary.com/definition/
perfect-competition
• https://en.wikipedia.org/wiki/Perfect_competiti
on
• http://www.investopedia.com/terms/p/perfectc
ompetition.asp
• http://www.economicsonline.co.uk/Business_e
conomics/Perfect_competition.html