This document discusses competition in markets through a series of examples and questions. It begins with an experiment involving different levels of competition and asks students to consider how it affects pricing power. It then discusses the benefits and drawbacks of competition for consumers and producers. Various market structures are introduced, including perfect competition as exemplified by markets like gasoline, salt, and paper clips. Firms in perfect competition are price takers, and the document explores how they can increase revenue and profit given these constraints.

1. On slates1. Describe a time you
paid more money for a
good or service you
thought was better quality.
2. Describe a time when
you bought a good or
service that was cheaper
than other brands.
3. Does competition make
us perform better?

2. Competition experiment
• 3 groups
• 1 person
• Group of 3, outside
• Everyone else, silent
• Think about price &
quality
I will buy one
for up to $1.50
Widget:
WPrice: $
Your name:

3. Pricing power
• Some firms can choose their own price
• Price makers
• Some firms must take the prices the
market gives them
• Price takers

4. On your slate
4. How much pricing power did you have
during the simulation? Explain why.
5. Why do consumers benefit from
competition? Use a specific business
examples in your answer
6. Why do producers suffer from
competition?
7. Why does pricing power depend on the
number of firms in the market?

5. I Love Lucy clip

6. On slates
If I’m going to the store to buy paper clips, what
am I going to care most about as a consumer?
If I’m going to the store to buy a smart phone,
what am I going to care most about as a
consumer?

7. Is this product cheap or expensive?
Is there a lot of variety in this product?
Is this product easy to buy?
Does this product become cheaper if I buy more
quantity?
Is this product easy for a firm to make?
Would this product be easy for a firm to leave the
market?

8. Economic Competition
• 5 basic market types:
– Perfect Competition
– Monopoly
– Monopolistic Competition
– Oligopoly
– Monopsony
• Measures price/nonprice competition, and
product differentiation

9. Perfect Competition Market
• Features:
• Many firms
• Nearly identical products
• No pricing power
• “price takers”
• Easy to start new firm
• Easy to close down firm
• Perfectly informed
consumers
• Costs really important
Other Examples?
Salt, gasoline, paper clips

10. Perfect Competition examples
On your slate
1.Write 2-3 examples of perfect competition
markets that I didn’t give you in class
2.If you were in a perfectly competitive market
how could you make more revenue?
3.If you were in a perfectly competitive market
how could you make more profit?
4.How might economies of scale help firms in
perfect competition?

11. On slates
1. 3 examples of
industries where firms
are price takers
2. 3 examples of
industries where firms
are price makers
3. Which type of industry
would be best to be an
entrepreneur?

12. review
• On slates correctly draw:
• MC, ATC, AFC, AVC
• Formally collecting papers

13. FIRMS IN COMPETITIVE MARKETS 13
The Revenue of a Competitive
Firm
• Total revenue (TR)
• Average revenue
(AR)
• Marginal revenue
(MR):
The change in TR from
selling one more unit.
∆TR
∆Q
MR =
TR = P x Q
TR
Q
AR = = P

14. A C T I V E L E A R N I N G 1
Calculating TR, AR, MR
14
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$102
$10$101
n/a$100
TRPQ MRAR
$10

15. A C T I V E L E A R N I N G 1
Answers
15
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$10
$10
$10
$10$102
$10$101
n/a
$30
$20
$10
$0$100
TR = P x QPQ
∆TR
∆Q
MR =
TR
Q
AR =
$10
$10
$10
$10
$10
Notice that
MR = P

16. FIRMS IN COMPETITIVE MARKETS 16
MR = P for a Competitive Firm
• A competitive firm can keep increasing its
output without affecting the market price.
• So, each one-unit increase in Q causes
revenue to rise by P, i.e., MR = P.
MR = P is only true for
firms in competitive markets.

17. FIRMS IN COMPETITIVE MARKETS 17
Profit Maximization
• What Q maximizes the firm’s profit?
• To find the answer, “think at the margin.”
If increase Q by one unit,
revenue rises by MR,
cost rises by MC.
• If MR > MC, then increase Q to raise
profit.
• If MR < MC, then reduce Q to raise profit.

18. Side by side graph

20. Cotton

22. Paper clip changes
Industry Firm
Metal price doubles ????
More offices file digitally ????
Dev. Countries get richer ????
3D printers become cheaper ????