Chapter 7: Perfect Competition

AGENDA Thurs 3/1 & Fri 3/2
QOD # 18: Risky Business (Worksheet)
Chapter 6 Quiz: Business Orgs
Perfect Competition
Stock Project Introduction
HW: pg 176 #1-5; pg 184 #1-5
Stock Investment Ideas
Chapter 7: Perfect Competition
Characteristics of Perfect Competition
Many buyers and sellers.
All firms sell identical goods.
Buyers and sellers have all
relevant information about
prices, product quality, and
sources of supply.
There is easy entry into the
market and easy exit out of
the market.
Perfect Competition
A market may not satisfy one or more of
the four conditions and still be perfectly
What determines whether a market is
perfectly competitive or not is if firms
(sellers) in the market are price takers.
Price Takers
A price taker is a seller
that can only sell its
output at equilibrium
A firm produces Q at
which MR = MC at E
(equilibrium price)
Price takers will not
sell for less than
What does a perfectly competitive firm do?
It produces where
marginal revenue
equals marginal cost.
It must sell its product
at equilibrium since it is
a price taker.
Profit in a perfectly competitive market
Profit acts as a signal to
firms not in the market to
enter the market.
As new firms enter the
market, they increase the
supply of the good that is
earning profit, and thus
lower its price.
Chapter 7.2: Monopoly
Characteristics of monopoly
There is one seller.
Sells a product for which
there is no close substitutes.
Extremely high barriers to
entry into the market.
Barriers to Entry
Legal Barriers
public franchise: ex cable TV
patent: 20 year exclusive rights to manufacture
copyright: intellectual rights of authors, artists
Extremely low per-unit costs
so low that it keeps competition away
natural monopoly
Exclusive ownership of scarce resource
A monopoly seller is not guaranteed profits.
Price is limited by the demand curve for the
Government & Market Monopolies
government monopolies refer to monopolies that are
legally protected from competition
market monopolies refers to monopolies that are not
legally protected from competition
natural monopolies exists when there is only one
seller due to low average total cost.
The monopoly firm is a price
The price searcher can
choose from various prices.
The monopoly firm will
produce where MR=MC.
Will charge the highest
possible price that it can sell
all its output.
Searches for the best price
through trial and error.