Economics 151 Course Notebook, Andrew T. Hill
Pure Competition
Purpose of Module: To understand the rationale underlying pricing and
output decisions of a firm in a purely competitive industry.
Questions to Ponder:
1.
2.
3.
4.
5.
6.
7.
What are the defining characteristics of the market structure
known as perfect competition?
What is mean when it is said that a firm in a perfectly
competitive market is a price taker?
Why does a perfectly competitive firm maximize short-run
profits (or minimize short-run losses) by producing the
quantity of output for which marginal cost is equal to
marginal revenue?
How can a supply curve for a perfectly competitive firm be
derived from its cost curves?
How can a short-run supply curve for an industry be derived
from the short-run supply curves of the individual firms in
that industry?
What are the characteristics of long-run equilibrium in a
perfectly competitive industry? How does such an industry
adjust in the long run to an increase or decrease in
demand?
Efficiency and perfect competition.
Market structure: Important characterisitics of a market, including:
1.
number of firms in the industry.
2.
similarity of products (goods & services).
3.
knowledge of the market by key players.
4.
ease of entry and exit in the industry.
Perfect Competition: A market structure characterized by:
1.
a large number of buyers and sellers of the product
2.
a homogeneous product
3.
perfect knowledge on the part of buyers and sellers
4.
easy entry and exit from the market
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Economics 151 Course Notebook, Andrew T. Hill
66
Characteristics of Different Market Structures:
Pure Competition
Number and size
of firms
Power to set price
Nature of product
Ease of entry and
exit
Pure Monopoly
Oligopoly
Monopolistic
Competition
Economics 151 Course Notebook, Andrew T. Hill
Price
67
Price
Qbillions
Market
Qthousands
Firm
Economics 151 Course Notebook, Andrew T. Hill
68
Marginal Revenue: The amount by which total revenue increases as a result of a one unit increase
in the quantity of output.
Marginal Cost: The amount by which total cost increases as a result of a one unit increase in the
quantity of output.
Total Revenue: Output Price x Quantity of Output = P x Q
Profit =
∆ Profit =
Summary: Profit maximizing conditions
1.
Π = TR - TC
2.
∆Π = ∆TR - ∆TC
3.
∆Π = ∆TR - ∆TC
∆Q = ∆QR- ∆Q
4.
∆Π = MR - MC
∆Q
Economics 151 Course Notebook, Andrew T. Hill
69
Why would we want to produce the 10th unit?
What are total profits at an output of 10?
P
$25
MC
$20
$15
d=MR
$10
$5
$0
0
5
10
15
20
25
Quantity
30
Economics 151 Course Notebook, Andrew T. Hill
70
Here we go again! Should we produce the 20th unit of output?
What will profits (or losses) be at 20 units of output?
P $25
MC
$20
$15
d=MR
$10
$5
$0
0
5
10
15
20
25
Quantity
30
Economics 151 Course Notebook, Andrew T. Hill
71
Where will total profits be maximized?
P
$25
MC
$20
$15
d=MR
$10
$5
$0
0
5
10
15
20
25
Quantity
30