A.S 3.1

 SLO: Describe characteristics of a perfectly competitive firm.
Derive the demand curve for a perfectly competitive firm given market demand and supply.
Calculate Total, Average and Marginal
Revenue for firms.

 Has the following characteristics
 Large number of buyers and sellers (firms)
 Firms have no market power and are price takers



Each firm supplies a small amount of the overall market supply
Firms cannot influence the market price by altering its output.
Only able to sell their good at the price determined in the market
 Output is homogenous
 Product is identical to that produced by other firms
 Resources are perfectly mobile
 Buyers and firms have perfect knowledge of the market
 No Barriers to entry or exit from the market


Market garden
 Uses simple resources
 Land, seeds, water, fertiliser, equipment and labour
 Price determined by the market
 What will happen to the price if demand increases?
 What may happen to the price if the growing conditions have been favourable?
NZ examples?
-Dairy farming
-Wool growing
-Fishing

Perfect Competition
Deriving the demand curve
20
10
0
60
50
40
P
30
Market
S
D
Demand curve for the perfectly competitive firm
20
10
0
60
50
40
30
Quantity
(million)
Because the perfectly competitive firm is a price-taker it faces a horizontal demand curve. The price is determined by demand and supply in the market.
D
10 20 30 40 50 60
Output
(000)

 SLO:

 Has the following characteristics
 Few number of large sellers, that dominate the market
 Sells similar but differentiated products.
 Price is usually similar across the industry
 Firms have some control over price
 Firms prefer to use non-price competition to provide a competitive advantage
 Strong barriers to entry by new firms
 Often accused of collusion, as existing firms look as though they act together in their pricing decisions.

 Petrol retailing companies
 Few large competitors

BP
 SHELL


Caltex
Mobil
 Smaller players

Challenge
 Gull
Other Examples
•New car market
-Ford, Mitsubishi,
Toyota, Honda
•Fast Food market
- McDonalds, KFC,
Burger King
•Retail banking market
- BNZ, ANZ, Kiwibank,
Westpac
Sell a homogeneous product. These firms differentiate their product with powerful branding using heavy advertising logos sponsorship and other promotions

p
P1
P2
P3 d
q1 q2 q3
If producer reduces price (from
P2 to P3) the competitors are likely to follow. The result is a smaller % increase in sales from q2 to q3. (inelastic demand).
q
If producer increases price (P2 to P1) the competitors are unlikely to follow. The result is a larger % fall in sales from q2 to q1 (elastic demand)

 A price war may arise ( firms keep lowering prices to try and gain a greater market share.
 This may result in a firm or firms being unable to operate and might be forced to leave the market altogether. While the firms that survived, will have to settle for decreased profits (as prices are lower) until the price war is over.
 Due to this risk, Oligopolists prefer not to use price competition and stick to using non-price competition.

 Product
Differentiation
 Product Variation
 Make the product appear different
 Make the product really different

 Has the following characteristics
 Market is dominated by two large producers
 Have considerable influence on price
 Produce differentiated products, with the use of non-price competition
 Strong barriers to entry of new firms

KEY
Market
Firm



 airline of Australia. The name was
Telecom and Vodaphone (one company owns 2 degrees) acronym/initialism for "Queensland and
Northern Territory Aerial Services".
Nicknamed "The Flying Kangaroo", the
Domestic airlines in NZ
 hub at Sydney Airport.
Quantas NZ and Air NZ
 Supermarkets
 Foodstuffs ( New World, Pak’ n’ Save)
 Woolworths Australia (Woolworths, Foodtown,
Countdown)

 Has the following characteristics
 One firm known as a monopolist
 One firm supplies the whole market or nearly the whole market- has considerable influence on the price by varying quantity it supplies
 Very strong barriers to entry and exit
 The product it sells has only one or no close substitutes

KEY
Market
Firm

 Tranz Rail
 Inter-island Ferry
 Postal delivery service: NZ post

 Is the sole BUYER in a market
 The market is dominated by one large firm that purchases the whole market supply or nearly the whole market
 Able to have significant influence on the price by varying the quantity it purchases
 Example: Fonterra

 Perfect imperfect
 Many, few, two, one
 Homogenous, differentiated, no close substitues
 None, weak strong