Perfect competition requires: - Numerous buyers and sellers who are price takers - Identical products - Free entry and exit from the market - Complete information Firms maximize profits by producing where marginal cost equals marginal revenue. In perfect competition, marginal revenue equals price for all firms. In the long run, perfect competition leads to an equilibrium with zero economic profits.

1. Perfect
Competition

2. The name of group members
 MD . ABRAR HOSSAIN SIKDER 152-11-950
 ALL NAHIAN NOMAN 152-11-938
 RANA SARKER 152-11-941
 MD.EBRAHIM KHAN SAYEM 152-11-954
 MD.ASHIFUR RAHMAN 152-11-953
 TANZILA AKTER 152-11-936

3. Perfect Competition
 The concept of competition is used in two ways in
economics.
 Competition as a process is a rivalry among firms.
 Competition as the perfectly competitive market
structure.

4. A Perfectly Competitive
Market
 A perfectly competitive market is one in
which economic forces operate
unimpeded.

5. A Perfectly Competitive
Market
 A perfectly competitive market must
meet the following requirements:
Both buyers and sellers are price takers.
The number of firms is large.
There are no barriers to entry.
The firms’ products are identical.
There is complete information.
Firms are profit maximizers.

6. The Necessary Conditions
for Perfect Competition
 Both buyers and sellers are price
takers.
 A price taker is a firm or individual who
takes the market price as given.
 In most markets, households are price
takers – they accept the price offered
in stores.

7. The Necessary Conditions
for Perfect Competition
 Both buyers and sellers are price takers.
 The retailer is not perfectly competitive.
A retail store is not a price taker but a price
maker.

8. The Necessary Conditions
for Perfect Competition
 The number of firms is large.
Large means that what one firm does has no
bearing on what other firms do.
Any one firm's output is minuscule when
compared with the total market.

9. The Necessary Conditions
for Perfect Competition
 There are no barriers to entry.
Barriers to entry are social, political, or
economic impediments that prevent other
firms from entering the market.
Barriers sometimes take the form of patents
granted to produce a certain good.

10. The Necessary Conditions
for Perfect Competition
 There are no barriers to entry.
 Technology may prevent some firms
from entering the market.
Social forces such as bankers only lending to
certain people may create barriers.

11. The Necessary Conditions
for Perfect Competition
 The firms' products are identical.
This requirement means that each firm's output is
indistinguishable from any competitor's product.

12. The Necessary Conditions
for Perfect Competition
 There is complete information.
Firms and consumers know all there is to
know about the market – prices, products,
and available technology.
Any technological breakthrough would be
instantly known to all in the market.

13. The Necessary Conditions
for Perfect Competition
 Firms are profit maximizers.
The goal of all firms in a perfectly competitive
market is profit and only profit.
The only compensation firm owners receive is
profit, not salaries.

14. The Definition of Supply
and Perfect Competition
 If all the necessary conditions for perfect
competition exist, we can talk formally
about the supply of a produced good.

15. The Definition of Supply
and Perfect Competition
 Supply is a schedule of quantities of
goods that will be offered to the market
at various prices.

16. The Definition of Supply
and Perfect Competition
 When a firm operates in a perfectly
competitive market, it’s supply curve is
that portion of its short-run marginal cost
curve above average variable cost.

17. Demand Curves for the
Firm and the Industry
 The demand curves facing the firm is
different from the industry demand curve.
 A perfectly competitive firm’s demand
schedule is perfectly elastic even though
the demand curve for the market is
downward sloping.

18. Demand Curves for the
Firm and the Industry
 Individual firms will increase their output in
response to an increase in demand even though
that will cause the price to fall thus making all
firms collectively worse off.

19. Market supply
Market
demand
1,000 3,000
Price
$10
8
6
4
2
0
Quantity
Market Firm
Individual firm
demand
Market Demand Versus
Individual Firm Demand Curve
10 20 30
Price
$10
8
6
4
2
0
Quantity

20. Profit-Maximizing Level of
Output
 The goal of the firm is to maximize profits.
 Profit is the difference between total
revenue and total cost.

21. Profit-Maximizing Level of
Output
 What happens to profit in response to a
change in output is determined by
marginal revenue (MR) and marginal cost
(MC).
A firm maximizes profit when MC = MR.

22. Profit-Maximizing Level of
Output
 Marginal revenue (MR) – the change in
total revenue associated with a change
in quantity.
Marginal cost (MC) – the change in total
cost associated with a change in quantity.

23. Marginal Revenue
 A perfect competitor accepts the market
price as given.
 As a result, marginal revenue equals price
(MR = P).

24. Marginal Cost
 Initially, marginal cost falls and then
begins to rise.
 Marginal concepts are best defined
between the numbers.

25. Profit Maximization: MC =
MR
 To maximize profits, a firm should produce
where marginal cost equals marginal
revenue.

26. How to Maximize Profit
 If marginal revenue does not equal
marginal cost, a firm can increase profit
by changing output.
 The supplier will continue to produce as
long as marginal cost is less than marginal
revenue.

27. How to Maximize Profit
 The supplier will cut back on production if
marginal cost is greater than marginal
revenue.
Thus, the profit-maximizing condition of a
competitive firm is MC = MR = P.

28. C
A
P = D = MR
Costs
1 2 3 4 5 6 7 8 910 Quantity
60
50
40
30
20
10
0
A
B
MC
Marginal Cost, Marginal
Revenue, and Price
0
1
2
3
4
5
6
7
8
9
10
$28.00
20.00
16.00
14.00
12.00
17.00
22.00
30.00
40.00
54.00
68.00
Price = MR Quantity
Produced
Marginal
Cost
$35.00
35.00
35.00
35.00
35.00
35.00
35.00
35.00
35.00
35.00
35.00

29. The Marginal Cost Curve Is
the Firm’s Supply Curve
A
B
C
Marginal cost
Cost,Price
$70
60
50
40
30
20
10
0 1 Quantity2 3 4 5 6 7 8 9 10

30. Profit Maximization Using
Total Revenue and Total Cost
 Profit is maximized where the vertical
distance between total revenue and
total cost is greatest.
 At that output, MR (the slope of the total
revenue curve) and MC (the slope of the
total cost curve) are equal.

31. TC TR
0
Totalcost,revenue
$385
350
315
280
245
210
175
140
105
70
35
Quantity1 2 3 4 5 6 7 8 9
Profit Determination Using Total
Cost and Revenue Curves
Maximum profit =$81
$130
Loss
Loss
Profit
Profit =$45
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

32. Long-Run Competitive
Equilibrium
 Profits and losses are inconsistent with
long-run equilibrium.
 Profits create incentives for new firms
to enter, output will increase, and the
price will fall until zero profits are made.
 The existence of losses will cause firms
to leave the industry.

33. Long-Run Competitive
Equilibrium
 Only at zero profit will entry and exit stop.
The zero profit condition defines the long-
run equilibrium of a competitive industry.

34. Long-Run Competitive
Equilibrium
MC
P = MR
0
60
50
40
30
20
10
Price
2 4 6 8 Quantity
SRATC LRATC

35. Thank you!