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Perfect Competition

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Revision presentation on perfectly competitive markets

Published in: Economy & Finance

Perfect Competition

  1. 1. A2 Micro: Market Structures Perfect Competition
  2. 2. What is Perfect Competition? HALFPPP • Homogenous Products (all perfect substitutes) • All firms have access to factors of production • Large number of buyers & sellers • Free entry and exit to/from the market • Perfectly elastic demand curve • Perfect knowledge / information • Profit maximization assumed as key objective
  3. 3. Price, Cost Output Price, Cost Output Market Supply and Demand Revenues, Costs and Profits for a Competitive Firm D S AC MC P 1 AR=MR Equilibrium price and output under perfect competition Price and Output
  4. 4. Price, Cost Output Price, Cost Output Market Supply and Demand Revenues, Costs and Profits for a Competitive Firm D S AC MC P 1 AR=MR Equilibrium price and output under perfect competition Price and Output
  5. 5. Price, Cost Output Price, Cost Output Market Supply and Demand Revenues, Costs and Profits for a Competitive Firm D S AC MC P 1 AR=MR Q1 C1 Supernormal profits Equilibrium price and output under perfect competition Price and Output
  6. 6. Perfect Competition Multiple Choice Question
  7. 7. Perfect Competition and the Shut Down Price
  8. 8. Monopolistic Competition Multiple Choice Question
  9. 9. Price, Cost Output Price, Cost Output Market Supply and Demand Revenues, Costs and Profits for a Competitive Firm D S1 AC MC P 1 AR1=MR1 S2 P 2 The entry of new firms into a competitive market Price and Output in the Long Run
  10. 10. Price, Cost Output Price, Cost Output Market Supply and Demand Revenues, Costs and Profits for a Competitive Firm D S1 AC MC P 1 AR1=MR1 Q2 AR2=MR2 S2 P 2 The entry of new firms into a competitive market Price and Output in the long run
  11. 11. Allocative Productive Dynamic Price = marginal cost Producing at the lowest point of the average cost curve Changes in the choices available in a market over time Economic Efficiency – Vitally Important in A2 Micro! Perfect competition and economic efficiency
  12. 12. Price, Cost Output Price, Cost Output Market Supply and Demand Revenues, Costs and Profits for a Competitive Firm D S1 AC MC Q2 AR2=MR2 S2 P 2 The entry of new firms into a competitive market Price and Output in the long run
  13. 13. Problems with the (theoretical) model of perfect competition • Most firms have some amount of price-setting power • Dominance of differentiated / branded products • Highly complex products, always information gaps • Impossible to avoid search costs even with digital technology • Patents, control of intellectual property, control of key inputs are all ignored by the competitive model • Rare for entry and exit in an industry to be costless Evaluation
  14. 14. Evaluation
  15. 15. A2 Micro: Perfect Competition

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