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    This document defines and explains the characteristics of perfect competition. It discusses (1) how a perfectly competitive firm determines its profit-maximizing output level where marginal revenue equals marginal cost, (2) how market equilibrium price and quantity are determined in the short-run and long-run through the interactions of supply and demand, and (3) why perfect competition leads to an efficient allocation of resources.

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    Chapter+12 Parkin PowerPoint

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    This document defines and explains the characteristics of perfect competition. It discusses (1) how a perfectly competitive firm determines its profit-maximizing output level where marginal revenue equals marginal cost, (2) how market equilibrium price and quantity are determined in the short-run and long-run through the interactions of supply and demand, and (3) why perfect competition leads to an efficient allocation of resources.

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    This document defines and explains the characteristics of perfect competition. It discusses (1) how a perfectly competitive firm determines its profit-maximizing output level where marginal revenue equals marginal cost, (2) how market equilibrium price and quantity are determined in the short-run and long-run through the interactions of supply and demand, and (3) why perfect competition leads to an efficient allocation of resources.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views19 pages

    Chapter+12 Parkin PowerPoint

    Uploaded by

    krcxpgsb47
    This document defines and explains the characteristics of perfect competition. It discusses (1) how a perfectly competitive firm determines its profit-maximizing output level where marginal revenue equals marginal cost, (2) how market equilibrium price and quantity are determined in the short-run and long-run through the interactions of supply and demand, and (3) why perfect competition leads to an efficient allocation of resources.

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    You are on page 1of 19

    Perfect Competition

    Chapter 12

    Economics 3ed: Global and Southern African Perspectives © 2020 1


    Main ideas
    After studying this chapter, you will be able to:

    • Define perfect competition


    • Explain how a firm makes its output decision
    • Explain how price and output are determined in a perfectly competitive market
    • Explain why firms enter and leave a competitive market
    • Predict the effects of a technological change in competitive market
    • Explain why perfect competition is efficient

    Economics 3ed: Global and Southern African Perspectives © 2020 2


    What Is Perfect Competition?
    Perfectly competitive market
    • Many firms sell identical products to many buyers
    • No restrictions on entry or exit
    • Established firms have no advantage over new ones
    • Sellers and buyers are well informed about prices
    How perfect competition arises
    • Minimum efficient scale of a single producer is small relative to the market demand
    for the good or service
    Price takers

    Economics 3ed: Global and Southern African Perspectives © 2020 3


    What Is Perfect Competition?
    Economic profit and revenue
    • Firm’s goal: maximise profit, where Profit = TR – TC
    • TR = P x Q
    • TC = opportunity cost of production
    • MR = ∆TR / ∆Q
    • In perfect competition MR = P

    Economics 3ed: Global and Southern African Perspectives © 2020 4


    What Is Perfect Competition?
    • Firm can sell any quantity it chooses at the market price (D = P = MR)

    Economics 3ed: Global and Southern African Perspectives © 2020 5


    What Is Perfect Competition?
    The firm’s decisions
    • To achieve maximum profit, a firm must decide:
    1. How to produce at minimum cost
    2. What quantity to produce
    3. Whether to enter or exit a market
    Answer to Q1 (from chapter 11)
    • Operate on LRAC curve

    Economics 3ed: Global and Southern African Perspectives © 2020 6


    The Firm’s Output Decision
    1. What quantity to produce

    Economics 3ed: Global and Southern African Perspectives © 2020 7


    The Firm’s Output Decision
    2. What quantity to produce
    • Profit-maximising Q where MR (= D = P) = MC

    Economics 3ed: Global and Southern African Perspectives © 2020 8


    The Firm’s Output Decision
    2. What quantity to produce
    • Profit-maximising Q where MR (= D = P) = MC

    Shutdown decision:
    Profit-maximising Q where MR = MC
    But what if P < ATC ?
    Loss comparisons:
    Economic loss = TFC + TVC – TR
    = TFC + (AVC x Q) – (P x Q)
    = TFC + (AVC – P) x Q
    Shut down if: TVC > TR or if AVC > P
    Shutdown point:
    Where AVC is at minimum

    Economics 3ed: Global and Southern African Perspectives © 2020 9


    The Firm’s Output Decision
    2. What quantity to produce
    The firm’s supply curve:
    • Derived from MC and AVC curves

    Economics 3ed: Global and Southern African Perspectives © 2020 10


    Output, Price, and Profit in the Short Run
    Market supply in the short run
    • Short-run market supply curve shows quantity supplied by all firms in the market at
    each price
    Short-run equilibrium
    • Where market D = market S
    Change in demand
    • Brings changes to short-run market
    equilibrium
    Profits and losses in the short run
    • Profit per Q = P – ATC
    • Economic profit = (P – ATC) x Q

    Economics 3ed: Global and Southern African Perspectives © 2020 11


    Output, Price, and Profit in the Short Run
    Three possible short-run outcomes

    Economics 3ed: Global and Southern African Perspectives © 2020 12


    Output, Price, and Profit in the Long Run
    3. Whether to enter or exit the market
    • In the long run firms can enter or exit the market
    • New firms enter when existing firms are making permanent profit – market P ↓ and
    economic profit ↓
    • Firms leave when they are making permanent losses – market P ↑ and economic
    profit ↑

    Long-run equilibrium
    • When economic profits and losses are eliminated
    • Entry and exit have stopped

    Economics 3ed: Global and Southern African Perspectives © 2020 13


    Output, Price, and Profit in the Long Run
    3. Whether to enter or exit the market

    Economics 3ed: Global and Southern African Perspectives © 2020 14


    Changing Demand and Supply due to
    Advancing Technology
    Decrease in demand

    Economics 3ed: Global and Southern African Perspectives © 2020 15


    Changing Demand and Supply due to
    Advancing Technology
    Increase in demand

    Economics 3ed: Global and Southern African Perspectives © 2020 16


    Changing Demand and Supply due to
    Advancing Technology
    Falling production costs
    • Increase in supply

    Economics 3ed: Global and Southern African Perspectives © 2020 17


    Competition and Efficiency
    Efficient Use of Resources
    • When MSC = MSB
    Choices, Equilibrium, and Efficiency
    Choices
    • Consumers allocate their budgets to get the most value possible out of them
    Equilibrium and Efficiency
    • Competitive equilibrium achieves efficient outcome:
    • P = MSB for consumers, and P = MSC for producers

    Economics 3ed: Global and Southern African Perspectives © 2020 18


    Competition and Efficiency

    Economics 3ed: Global and Southern African Perspectives © 2020 19

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