BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Lesson title: Market Structure (Perfect Competition)
Lesson Objectives:
1. I can define market structure.
2. I can enumerate the characteristics of perfect/pure competition.
3. I can explain a perfectly competitive firm’s profit-maximizing
choices.
Class number: _______
Date:_______________
Materials:
Student Activity Sheets
References:
https://online.aurora.edu/types-ofmarket-structures/
Managerial Economics Business
Strategy Ninth Edition by
Baye,Prince,2017
Investopedia.com
“Don’t wait until you’ve reached your goal to be
proud of yourself. Be proud of every step you take
toward reaching that goal”
A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
A pleasant day to you buddy! How’s your quiz last time? I hope you have passed and get a high score.
For this meeting, we will now discuss the market structure. There are several types of market structure
and to begin with, we will tackle today the “Perfect/Pure Competition.
Activity 1: What I Know Chart (3 min)
Direction: I posted some questions on the table below. I want you to express your initial understanding
regarding those questions. Don’t worry my dear student because your opinion/answer will not be
marked “Wrong or incorrect”. Just feel free to express your ideas, okay? You can do it!
What I Know
Questions:
What I Learned (Activity 4)
1. What is a market
structure?
2. What are the
characteristics of firms
operating under perfectly
competitive market?
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
B.MAIN LESSON
1) Activity 2: Content Notes (13 min)
MARKET STRUCTURE
Market structures refer to the different market characteristics that determine relations between sellers
to each another, of sellers to buyers and more. There are several basic defining characteristics of a
market structure, such as the following:
 The commodity or item that’s sold and the extent of production differentiation.
 The ease or difficulty of entering and exiting the market.
 The distribution of market share for the largest firms.
 The number of companies in the market.
 The number of buyers and how they work with or against the sellers to dictate price and quantity.
 The relationship between sellers.
A. PERFECT/PURE COMPETITION
Perfect competition describes a market structure, where a large number of small firms compete against
each other. In this scenario, a single firm does not have any significant market power. As a result, the
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
industry as a whole produces the socially optimal level of output, because none of the firms have the
ability to influence market prices.
The idea of perfect competition builds on a number of
assumptions: (1) all firms maximize profits (2) there is free
entry and exit to the market, (3) all firms sell completely
identical (i.e. homogenous) goods, (4) there are no consumer
preferences. By looking at those assumptions it becomes quite
obvious, that we will hardly ever find perfect competition in
reality. This is an important aspect because it is the only
market structure that can (theoretically) result in a socially
optimal level of output.
We have seen that a perfectly competitive firm’s marginal
revenue curve is simply a horizontal line at the market price
and that this same line is also the firm’s average revenue curve. For the perfectly competitive firm,
MR=P=AR. The marginal revenue curve has another meaning as well. It is the demand curve facing a
perfectly competitive firm.
Rule: Price (P) = Marginal Revenue (MR) = Average Revenue (AR)
Short Run Profit Maximization
Total Revenue – Total Cost
Marginal Revenue –
Approach
Marginal Cost Approach
Profit becomes maximum
The profit-maximizing level of
irrespective of the market situation, output is that output level
when the difference between total
where MR = MC. This is
revenue (TR) and total cost (TC)
known as the MR=MC rule.
becomes the greatest.
Long Run Profit Maximization
In the long-run, firms may enter or
exit the market. For firms operating
in a perfectly competitive market,
equilibrium is achieved when the
long-run marginal cost is equal to
the marginal revenue and price.
LMC = MR = P
Approach # 1. Equilibrium of a Firm—The Total Revenue and Total Cost Approach:
Profit becomes maximum irrespective of the market situation, when the difference between total
revenue (TR) and total cost (TC) becomes the greatest. In the figure, a TR curve for a perfectly
competitive firm has been drawn. The TR curve starts from the origin and it rises in proportion to the
rise in the volume of sales.
Approach # 2. Equilibrium of a Firm—the Marginal Revenue and Marginal Cost Approach:
Irrespective of the market conditions, a firm will stop production if
total revenue falls short of total variable cost. Profit will be
maximized at that point where MR and MC are equal to each
other. For any output MR > MC, the firm will expand output.
Doing so, it will add more to its revenues them to its costs,
thereby increasing profit. On the other hand, for the output
MR >MC means that there is no incentive on the part of the firm
to raise its output. If it decides to increase output when MC > MR,
it will add more to its costs than to its revenues, thus reducing
profit. Hence the profit-maximizing output occurs at that
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
point when MR = MC.
Activity 3: Skill-Building Activities (20min)
Direction: Complete the table and answer the following questions:
Total
Price
Total
Marginal
Average
Total Cost
Product
Revenue
Revenue
Revenue
(Qty.)
(P x Q) *
(TR/Q) *
0
50
120
1
50
150
2
50
175
3
50
193
4
50
218
5
50
248
6
50
282
7
50
322
8
50
372
9
50
427
10
50
485
Marginal
Cost *
Profit (TR
– TC) *
Questions:
1. Applying the marginal revenue-marginal cost approach, at what output level does the firm maximize
its profit?
__________________________________________________________________________________
__________________________________________________________________________________
2. Given your answer on # 1, at this output level, how much is the firm’s profit?
__________________________________________________________________________________
__________________________________________________________________________________
3. What can you observe on the price, average revenue and marginal revenue?
__________________________________________________________________________________
__________________________________________________________________________________
4. Can a seller operating under a perfectly competitive firm adjust price at any instance he wants to?
What could be the implication if he adjusts the prices of his products?
__________________________________________________________________________________
__________________________________________________________________________________
Practice Problem
Patricia is a perfectly competitive wheat farmer. Her average
variable cost curve and her marginal cost are shown in the figure.
a. If the price of a bushel of wheat is $6 per bushel,
how much wheat will Patricia produce?
b. If the price of a bushel of wheat falls to $4 per
Bushel, how much wheat will Patricia produce?
c. What are the two points on Patricia’s supply curve?
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
d. What is the lowest price for which Patricia will produce
Wheat rather than shut down?
Answers to Practice Problem:
1a. When the price of a bushel of wheat is $6 per bushel,
Patricia’s marginal revenue curve is shown in the figure as MR1.
To maximize her profit, Patricia produces 200 bushels of wheat
the quantity of which marginal revenue equals marginal cost
1b. If the price of wheat falls to $3 per bushel, Patricia’s marginal
Revenue curve is shown in the figure MR2. She creases the
Quantity of wheat she produces to 150 bushels per week
because that is the quantity at which marginal revenue equals
marginal cost.
1c. One point on Patricia’s supply curve is a price of $6 and
200 bushels. Another point is a price of $3 and a quantity of
150 bushels.
1d. The lowest price for which Patricia produces rather than shut down is the price equal her minimum
average variable cost. The figure shows that this price is equal to $2 per bushel.
Question 2. Suppose that when the price of a bushel of wheat is $6, Patricia produces a quantity of
wheat such that her marginal revenue is greater than marginal cost. Explain why she is not maximizing
profit.
Answer: If marginal revenue exceeds marginal cost, then the extra revenue from selling one more
bushel of wheat exceeds the extra cost incurred to produce it. So if Patricia produces one more bushel
of wheat, the marginal revenue that she receives from selling that bushel is greater than the cost to
produce that bushel and this bushel increases her profit. To maximize profit, Patricia must increase her
output until she reaches the point where the marginal revenue equals the marginal cost.
Activity 4: What I Know Chart (2min)
Finally, you’ve learned a lot about our topic today. I know you’re excited to revisit your answer on
Activity 1 and enhance them. Go back to Activity 1 and fill out the third column.
2) Activity 5: Check for Understanding (15min)
Short answer and numeric questions.
1. What are the conditions that define perfect competitions?
2. What is a “price taker”? Why are perfectly competitive firms price takers?
3. What is the difference between a perfectly competitive firm’s demand curve and the market demand
curve?
4. Willy, a perfect competitive wheat farmers, can sell 999 bushels of wheat for $3 per bushel or 1,000
bushels for $3 per bushel. What is Willy’s marginal revenue and total revenue if he sells 1,000 bushel of
wheat?
5. Why are perfectly competitive firms unable to make an economic profit in the long run? Why won’t
they incur an economic loss in the long run?
6. Is perfect competition efficient?
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
ANSWERS to Numeric Questions
1. Perfect competition exists when many firms sell an identical product to many buyers; there are no restrictions on
entry (or exit from) the market; established firms have no advantage over new firms; and sellers and buyers are well
informed about prices. (4 points)
2. A price taker is a firm that cannot influence the price of the good or service it produces. Perfectly competitive
firms are price takers because there are many competing firms selling an identical product. Any idividual form is
such a small part of the market that its actions cannot affect the price. (2 points)
3. A perfectly competitive firm’s demand is perfectly elastic because all sellers produce goods that are perfect
substitutes. So, the firm’s demand curve is horizontal. The market demand curve is downward sloping.(2 pts.)
4. Willy’s marginal revenue equals the price of a bushel of wheat, which is $3, His total revenue equals price
multiplied by quantitity, which is $3,000. (2 points)
5. Perfectly competitive firms cannot make an economic profit in the long run because the existence of an economic
profit invites entry by new firms. As these new firms enter, the market supply increases, driving down the price and
eventually eliminating the economic profit. If perfectly competitive firms incur an economic loss, they close because
no firm will incur an economic loss in the long run. As some firms close, the price rises and the economic loss of the
surviving firms decreases and is eventually elimiated when enough firms have closed. (2 points)
6. Yes. In a perfectly competitive market, equilibrium occurs at the intersection of the supply and demand curves.
However, the facts that the supply curve also is the marginal cost curve and the deman demand curve also is
marginal benefit curve.So, the quilibrium quantity also is the quantity at which the marginal cost equals the marginal
benefit, which is the efficient quantity. (2 points)
Total points for short answer and numeric questions = 14 pts.
Complete the graph
1. In Figure 11.6, suppose that the price of the food
Is $20. Show the long-run equilibrium for a perfectly
Competitive firm that produces150 per week.
2. Figure 11.7 shows cost curves for two firms in an
Industry undergoing technological change. Firm 1 uses
the old technology and has an average total cost curve
ATC1 and marginal cost curve MC1. Firm 2 use the
new technology and has an average total cost curve
ATC2 and marginal cost curve MC2. Initially the price
of the product was $6.
a. At the price of $6, do firm 1 and firm 2 make an
economic profit, zero economic profit or incur
economic loss?
b. As for firms adopt the new technology, what
happens to market supply and price? Do firms 1 and 2
make an economic profit, zero economic profit, or
Incur an economic loss?
c. In the long run, what will be the new price? Will
firm 1make an economic profit, zero economic profit,
or incur an economic loss? Will firm 2 make an
economic profit, zero economic profit or incur economic
loss?
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
Answers to Complete the graph:
1.
The graph shows a perfectly competitive firm in long run
equilibrium. The marginal revenue curve is horizontal at the
price of $20. the firm produces 150 units because that is the
quantity at which marginal revenue equals marginal cost. The
firm makes zero economic profit because the price, $20 per
unit, equals the average total cost, also $20 per unit.
(5 pts. Includig the graph on the right side)
2. a. At the price of $6, the marginal revenue curve is MR1 (see the graph)
Firm 1 produces 20 units and makes zero economic profit because
the $6price equals average total cost. Firm 2 produces 35 units
and makes an economic profit because the $6 price exceeds
average total cost. (2 pts.)
b. Market supply increases and the price falls. Firm 1 now incurs an
economic loss and Firm 2 makes a smaller economic profit. (3 pts)
c. In the long run, the new price will be $4 because that is the
minimum of the new average total cost. Firm 1 will either have
adopted the new technology and be making zero economic profit
or will have exited the industry. Firm 2 will make zero economic
profit, (3 pts.)
C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5mins)
A. Work Tracker
Congratulations! You are done with our session! Let’s track your progress. Shade the session number
you just completed.
B. Think about your Learning
1. Do you fully understand our topic today? What are your strategies in order to understand the topic?
_________________________________________________________________________________
_________________________________________________________________________________
2. What is your question about perfect/pure competition?
_________________________________________________________________________________
_________________________________________________________________________________
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This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
Teacher’s Guide Module #22
Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Class number: _______
Date:_______________
Key to Corrections
Skill Building Activities
Total
Price
Product
(Qty.)
0
50
1
50
2
50
3
50
4
50
5
50
6
50
7
50
8
50
9
50
10
50
Total
Revenue (P
x Q) *
0
50
100
150
200
250
300
350
400
450
500
Marginal
Revenue
50
50
50
50
50
50
50
50
50
50
Average
Revenue
(TR/Q) *
50
50
50
50
50
50
50
50
50
50
Total Cost
Marginal
Cost *
120
150
175
193
218
248
282
322
372
427
485
30
25
18
25
30
34
40
50
55
58
Profit (TR –
TC) *
-120
-100
-75
-43
-18
2
18
28
28
23
15
1. 8 units. This is where Marginal Revenue = Marginal Cost
2. The maximum profit is 28
3 Price, average revenue and marginal revenue are all equal to 50.
4. A seller may adjust the prices of his products but as he continues to decrease the prices in order to
attract customers, this will eventually result to a loss.
Submit your activity sheets before the end of the session!
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This document and the information thereon is the property of PHINMA Education