Perfect competition is a market structure characterized by numerous small firms, homogeneous products, free entry and exit of firms, and perfect information. Under perfect competition, firms are price takers and cannot influence the market price. The equilibrium price is determined where industry demand equals industry supply and firms produce where price equals marginal cost, resulting in an efficient allocation of resources.

1. Perfect Competition
IMPORTANCE OF MARKET
STRUCTURE
The type of decisions a firm takes and
the potential of the firm to earn
profits in the long run , depends on
the type of market structure in which
the firm operates.

2. Market structure
Perfect competition
Imperfect competition
monopoly Monopolistic
competition oligopoly

3. Characteristics of a perfectly
competitive market
• Large no of buyers and sellers
• Homogenous product
• Free entry and exist of firms
• Perfect mobility
• Absence of transportation cost

4. Demand curve of a firm in
competitive market
price
quantity
P=AR=MR

5. The equilibrium price
Eq.p
rice
quantity

6. CASE study
Credit cards and perfect competition

7. Profit maximization in the short
run
Qd=170,000,000-10,000,000P
Qs=70,000,000+15,000,000P
Equilibrium price is at Qd=Qs
170,000,000-10,000,000P=70,000,000+
15,000,000P
Or170,000,000-70,000,000=15,000,000P+10,000,000P
OR 100,000,000=25,000,000P
Or P=4

8. ENTRY AND EXIST
Afirm with function 1000+1000P leaves
Qs will become 69,999,000+14,999,000P
Equilibrium price will be 4.0002 a very
little effect

9. nUMERICALS
Anew pizza place , fredrico’s opens
in new york city .The average price
of a medium pizza in newyork is
$10The owner esimated tha total
costs including a normal profit will
be
TC=1000+2Q+0.01Q2
TOmaximize the
profit how many pizzas should be made

10. Solutions
MC=dTC/Dq=2+0.02Q PROFIT IS
MAXIMIZED AT P=MC
10=0.02Q+2
OR Q =400
ECONOMIC PROFIT=tr-tc
10*400-
(1000+2*400+0.01*4002
)=$600

11. Structure of the cost curves
Profit
D=ar=Mr
MC
A
C
qM QE
p
E

12. Total cost and total revenues
Market
price
Rate of
output and
sales
Total
revenue
Total fixed
cost
Total
variable
cost
Total cost profit
10 1 10 30 4 34 -24
10 2 20 30 7 37 -17
10 3 30 30 9 39 -9
10 4 40 30 11.5 41.5 -1.5
10 5 50 30 14.5 44.5 5.5
10 6 60 30 18.5 48.5 11.5
10 7 70 30 25 55 15
10 8 80 30 35 65 15
10 9 90 30 51 81 9
10 10 100 30 75 105 -5

13. Market structure
TR
TC
PRICE
QUANTITY
E

14. Calculating the shut down price
Abicycle manufacturer faces
ahorizontal demand curve .the
firm’s total costs are given by the
equation
TVC=150Q-20Q2
+Q3 AT WHAT PRICE
THE FIRM SHOULD SHUT DOWN

15. SOLUTIONS
MC=dTVC/dQ
=150-40Q+3Q2
AVC=
TVC/Q=150-20Q+Q2
150-20Q+Q2
=150-40Q
+3Q2
=2Q2
-20Q=0OR Q=10 P=MC=MR=AR=50
THUS IF THE PRICE FALLS BELOW $50PER
UNIT THE FIRM SHOULD SHUT DOWN

16. When should a firm close down
As long as price exceeds average variable costs,
the firm is better off if it continues to produce.
The reason is that revenue will be sufficient to
cover variable costs and make a contribution to
the payment of the firm’s fixed costs. In contrast
shutting down means that the firm’s loss is entire
fixed cost.

17. ATC
A VC
MC
PΠ
Ps
price
quantity
Shut down
point

18. Profit –maximizing output in the
long run

19. Shut down
The rule does not necessarily mean that
managers should shut down operations
every time price drops below average
variable cost. A decision to shut down will
be made only if it is expected that price will
remain below average variable cost for an
extended period of time.

20. Key concepts to remember
• In the long run, economic profit is eliminated by the entry
of new firms. THE profit maximizing rate of output occurs
where price equals both marginal and average cost.
• Consumers who would have been willing to pay more than
the market price receive a consumer surplus when they buy
the product .
• In perfectly competitive markets(1)the value of the last
unit exchanged equals the opportunity cost of producing it.
(2)capital moves to its highest valued use.(3)production
takes place at the minimum point on the average cost
curve.

21. Consumer surplus
d
s
Pe
cs

22. Characteristics of Perfect
competition
Marginal costs are a measure of the opportunity
cost of producing one more unit of the
product.For ex to produce an additional
automobile fuel , labour, capital must be
diverted from other uses. The value of these
inputs in those other uses is measured by their
cost. The sum of these input costs is the
marginal cost and represents the opportunity
cost of producing an additional car, as shown
by the supply curve.

23. characteristics
The profit maximizing firm in perfect
competition will expand production until price
equals marginal cost.Concurrently,buyers will
purchase the firm’s product until price exceeds
the relative value that they attach to the
product.Because of the price paid by the
consumer is identical to the additional revenue
received .

24. characteristics
Perfect competition results in the
right amount of product being
produced.
Resources are efficiently allocated
among alternative uses