This document discusses pricing and output decisions under pure competition. It defines key terms like market, market structure, and types of market structures. Pure competition is characterized by many small firms, identical goods, free entry and exit. In the short run, firms will produce where marginal revenue equals marginal cost to maximize profits. In the long run, firms will enter or exit the industry until price equals minimum average total cost and economic profits are zero. Overall, pure competition is said to lead to efficient allocation of resources, though it has shortcomings around income distribution and market failures.

1. PRICING AND OUTPUT DECISION
UNDER PURE COMPETITION

2. MARKET AND MARKET STRUCTURE
MARKET
- It is a place where goods and services are being purchased.
In Economics,
Market means a social system through which the seller and
purchasers of a commodity can interact with each other.

3. ■ They can participate in sale and purchase.
■ Market does not refer to a particular place or location.
■ It refers to an intitutional relationsip between purchasers
and sellers.
■ Market is an arrangement which links buyers and sellers.
MARKET AND MARKET
STRUCTURE

4. TYPES OF MARKET STRUCTURE:
✔ Pure/Perfect Competition
✔ Monopoly
✔ Monolpolistic Competition
✔ Oligopoly
MARKET AND MARKET
STRUCTURE

5. PURE COMPETITION
⚪ Large number of buyers and sellers
⚪ All firms are price takers
⚪ Buyers know the nature of the product being sold and prices charged
by each firm.
⚪ Produce identical goods and services.
⚪ Free entry and exit

6. When there are large numbers of sellers and
buyers of a commodity, each would be too
small a unit to affect the price of the
commodity.
The firm faces an infinitely elastic demand
curve which can sell any amount it can produce
at that price.
DEMAND CURVE

7. Individual firm faces a horizontal
demand curve, the industry demand
curve is still downward sloping.
The market price is then determined
by the interaction of demand and
supply.
DEMAND CURVE

8. SHORT RUN EQUILIBRIUM OF
THE FIRM
Short run is the time period in which firm can vary its output but
does not have time to change its plant size.
The number of firms in an industry is fixed because new firms do
not have time to enter and existing firms do not have time to
leave.

9. SHORT RUN EQUILIBRIUM OF THE
FIRM: TOTAL COST APPROACH
The competitive market is faced with the following questions:
1. Should I produce?
2. What will I produce and how much?
3. Will profit will be realized?
4. How much loss or profit?

10. SHORT RUN EQUILIBRIUM OF THE
FIRM: TOTAL COST APPROACH

11. SHORT RUN EQUILIBRIUM OF THE
FIRM: TOTAL COST APPROACH
1. A firm should produce if the difference between total revenue and
total cost is profitable.
2. The break-even point is arrived when total revenue is equals total
cost. The producer has to break even first.
3. The firm should not produce, but shut down in the short run will
incur losses if costs exceeds revenues.
4. Determine at what point the firm would minimize losses

12. SHORT RUN EQUILIBRIUM OF THE
FIRM: TOTAL COST APPROACH
✔ At which point profit maximizes?
✔ At which point firm registers a break even point?
✔ At which point firm registers shut down
Profit = TR - TC ; 4,450 = 16,450 - 12,000
Corresponds of the minimum ATC
Corresponds of the minimum AVC
✔ At which point firm losses?
Any point before or after MR = MC

13. BREAK EVEN PRICE
● If price > ATC, it earns an economic profit.
● If price = ATC, zero economic profit.
● If price < ATC, earns loss

14. SHUT DOWN POINT
● If the center shuts down, revenues are zero but it will not incur any
variable costs and would only need to pay fixed costs of 10,000.
P = 0 - 10,000
P = - 10,000
● The center earns revenues of 10,000 and variable costs are
15,000. The center should shut down now.
P = 10,000 - ( 10,000 - 15,000
P = - 15,000

15. ● In all two cases, the center loses money. In the 1st
scenario, the center does not have any revenues, so
hiring instructors would increase variable costs and
losses, so it should shut down and only incur fixed
costs.
● Scenario 2, the center losses are greater because it
does not make enough revenue to offset the increased
variable costs plust fixed costs, so it needs to shur down
immediately.
SHUT DOWN POINT

16. SHORT RUN EQUILIBRIUM OF THE
FIRM: MARGINAL APPROACH
1. MR = MC rules that the firm will maximize profits or minium losses
by producing at the point at which MR = MC.
A firm maximizes profit in
accordance with the marginal cost
and marginal revenue.
MR =
🔺TR/🔺Q
MC =
🔺TC/🔺Q

17. SHORT RUN EQUILIBRIUM OF THE
FIRM: MARGINAL APPROACH
● The marginal revenue does not change as the firm produces
more output.
● Marginal cost at first declines as production increases 2 to 8,
which represents the area of increasing return. But then marginal
cost start to increase, displaying the typical pattern of diminishing
marginal returns.
● Profit is maximized at output 18 where marginal revenue just
equals the marginal cost.

18. LONG RUN EQUILIBRIUM OF THE FIRM
A market reaches a long run when three conditions hold:
● The quantity of the product supplied equals the
quantity demanded
● Each firm in the market maximizes it profit, given the
market price.
● Each market earns zero economic profit.

19. LONG RUN EQUILIBRIUM OF THE FIRM
Several assumptions are made:
✔ Entry and exit of firms are only long run adjustments.
✔ Firms in the industry have identical cost curves.
✔ The industry is a constant cost industry.

20. LONG RUN EQUILIBRIUM OF THE FIRM
In long run, price equals marginal cost (profit maximization), and price
equals short run average total cost (zero economic profit).
✔ Firms seek profit and avoid losses.
✔ Under competition, firms may enter and leave the industry freely.
✔ If short rub losses occur, firms will leave the industry; if economic
profit occur, firms will enter the industry.

21. EFFICIENT ALLOCATION OF
RESOUCES
Subject to certain limitations, most economist agree that a pure
competitive economy will lead to the most efficient allocation of
resources.
1. The presence of competition, firms would be forced to produce those
goods which consumers want most.
2. The presence of competition forces firms to use the mostbefficient, or
least cost methods in production of goods.

22. SHORTCOMINGS OF THE
COMPETITIVE PRICE SYSTEM
1. The income distribution problem.
2. Market failure: External costs and public goods.