This document defines the characteristics of perfect competition and outlines the necessary conditions for a perfectly competitive market. It explains that in perfect competition, there are many small firms and buyers/sellers that are price takers, homogeneous products, free entry and exit, and perfect information. Firms produce at the quantity where price equals marginal cost to maximize profits. In the long run, perfect competition leads to zero economic profits and constant costs as firms enter and exit the market.

2. Perfect Competition

3. Presented by
Shoaib Raza

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 buyers & firms is large.
 There are no barriers to entry.
 The firms’ products are homogeneous.
 There is complete information.
 Firms are profit maximizers.

6. The Necessary Conditions for
Perfect Competition
Both buyers and sellers are price takers.
 A pricetakeris 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 small when
compared with the total market.

9. The Necessary Conditions for
Perfect Competition
There are no barriers to entry.
 Barrierstoentryare 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 Supplyand 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 Supplyand 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.

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Market Demand Versus
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19. Profit-Maximizing Level of
Output
The goal of the firm is to maximize profits.
Profit is the difference between total
revenue and total cost.

20. 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) maximizes profit when MC = MR.

21. Short-Run Market Supply
and Demand
 While the firm's demand curve is perfectly
elastic, the industry's is downward sloping.
 For the industry's supply curve we use a
market supply curve.

22. Short-Run Market Supply
and Demand
 The market supply curve is the horizontal sum
of all the firms' marginal cost curves, taking
account of any changes in input prices that
might occur.

23. 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.

24. 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.

25. Long-Run Competitive
Equilibrium
MC
P = MR
Price
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SRATC LRATC

26. Long-Run Competitive
Equilibrium
Zero profit does not mean that the
entrepreneur does not get anything for his
efforts.
Normal profit – the amount the owners of
business would have received in the next-
best alternative.

27. Long-Run Market Supply
In the long run firms earn zero profits.
If the long-run industry supply curve is
perfectly elastic, the market is a constant-
cost industry.

28. Long-Run Market Supply
Two other possibilities exist:
 Increasing-cost industry – factor prices rise
as new firms enter the market and existing
firms expand capacity.
 Decreasing-cost industry – factor prices fall
as industry output expands.