Perfect Compitition

7/31/2019 Perfect Compitition

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PERFECT COMPETITION



M. WAQAS 11014220-019

USMAN NADEEM 11014220-018

GROUP MEMBERS

BILAL AHMED 11014220-033

SHOAIB ARSHAD 11014220-126

GOHAR EJAZ 11014220-027



The Three Requirements of

Perfect Competition

Large numbers of buyers and

sellers, and a uy or on y a ny ra on

of the total quantity in the market

Sellers offer a standardized product

Sellers can easily enter into or exitfrom market



A Large Number of Buyers and

Sellers

In perfect competition, there

must be many buyers andse ers

How many? Number must be so large that no individual

decision maker can significantly affect price of the product by changing quantity it buys orsells



A Standardized Product

Offered by Sellers

Buyers do not perceive significant

differences between products of

For instance, buyers of wheat do notprefer one farmer’s wheat overanother



Easy Entry into and Exit from

the Market

Perfect competition is also characterizedby easy exit

-able to sell off its plant and equipment andleave the industry for good, withoutobstacles

Significant barriers to entry and exit cancompletely change the environment inwhich trading takes place



Is Perfect Competition Realistic? Assumptions market must satisfy to be perfectly

competitive are rather restrictive In vast majority of markets, one or more of

assumptions of perfect competition will, in a strict,

Yet when economists look at real-world markets, they useperfect competition more often than any other marketstructure

Why is this? Model of perfect competition is powerful Many markets—while not strictly perfectly competitive—

come reasonably close

We can even—with some caution—use model toanalyze markets that violate all three assumptions



Figure 1: The Competitive

Industry and Firm

Price per Ounce

S

Market Firm

1. The intersection of the market supplyand the market demand curve…

3. The typical firm can sell all itwants at the market price…

Price per Ounce

Ounces of Gold per Day

D

$400Demand

Curve Facingthe Firm

$400

Ounces of Gold per Day

2. determine the equilibriummarket price

4. so it faces a horizontaldemand curve



Figure 2(a): Profit Maximization

in Perfect CompetitionTR

$2,800

2,100

TC

Dollars

Maximum Profitper Day = $700

550Slope = 400

Ounces of Gold per Day1 2 3 4 5 6 7 8 9 10



Figure 2(b): Profit Maximization

in Perfect Competition

MC

Dollars

$400 D = MR

Ounces of Gold per Day1 2 3 4 5 6 7 8 9 10



The Total Revenue and Total

Cost Approach

Most direct way of viewing firm’s

search for the profit-maximizing

At each output level, subtract total

cost from total revenue to get totalprofit at that output level

Total Profit = TR - TC



The Marginal Revenue and

Marginal Cost Approach

Firm should continue to increase outputas long as marginal revenue > marginalc st

Remember that profit-maximizingoutput is found where MC curve crosses

MR curve from below Finding the profit-maximizing output

level for a competitive firm requires no

new concepts or techniques



Measuring Total Profit Start with firm’s profit per unit

Revenue it gets on each unit minus cost per unit Revenue per unit is the price (P) of the firm’s output,

and cost per unit is our familiar ATC, so we can write Profit er unit = P – ATC

Firm earns a profit whenever P > ATC Its total profit at the best output level equals area

of a rectangle with height equal to distancebetween P and ATC, and width equal to level of output

A firm suffers a loss whenever P < ATC at thebest level of output Its total loss equals area of a rectangle

Height equals distance between P and ATC



Figure 3(a): Measuring Profit

or Loss

MC

ATC

Economic Profit

Dollars

$400300

d = MR

Ounces of Gold per Day1 2 3 4 5 6 7 8



Figure 3(a): Measuring Profit

or Loss

MC

Economic Loss

Dollars

ATC

d = MR

$300

200

Loss per Ounce ($100)

Ounces of Gold per Day1 2 3 4 5 6 7 8



The Notion of Zero Profit in

Perfect Competition

We have not yet discussed plant size of competitive firm

— —cause all firms to earn zero economicprofit also ensure

In long-run equilibrium, every competitivefirm will select its plant size and outputlevel so that it operates at minimum pointof its LRATC curve



Figure 9: Perfect Competition

and Plant Size

LRATC MC 1 ATC

LRATC

Dollars Dollars

3.As all firms increase plant size andoutput, market price falls to its lowestpossible level . . .

1. With its current plant and ATC curve, this firm earns zeroeconomic profit.

P 1

q1

d 1 = MR 1

E

d 2 = MR 2

MC 2 ATC 2

P*

q* 4. and all firms earnzero economic profitand produce atminimum LRATC.

.

Output per Period

Output per Period

2. The firm could earnpositive profit with alarger plant,producing here.



A Change in Demand Short-run impact of an increase in demand is

Rise in market price

Rise in market quantity

Economic profits

What happens in long-run after demand curve shiftsrightward? Market equilibrium will move from point A to point C

Long-run supply curve Curve indicating quantity of output that all sellers in a

market will produce at different prices After all long-run adjustments have taken place



Figure 10: An Increasing-Cost

IndustryINITIAL EQUILIBRIUM

S1MC

MarketDollars

FirmPrice

per Unit

D1

AP 1

Q1

P 1

q1

A

ATC 1

d 1 = MR 1

Output per Period

Output per Period



Figure 10: An Increasing-Cost

Industry NEW EQUILIBRIUM

MC

DollarsFirmMarket

S1

Priceper Unit

d SR = MR SRP SR P SR ATC 2 C

B

B S2

ATC 1

P 1

q1

Ad 1 = MR 1

Output per Period

Output per Period

D1

AP 1

Q1

d 2 = MR 2 P 2 P 2 C

QSR Q2 q1 q1

D2



Market Signals and the Economy In real world, demand curves for different goods and

services are constantly shifting As demand increases or decreases in a market, prices

change conomy s r ven o pro uce w a ever co ec on o

goods consumers prefer In a market economy, price changes act as market

signals, ensuring that pattern of production matches

pattern of consumer demands When demand increases, a rise in price signals firms to enter

market, increasing industry output When demand decreases, a fall in price signals firms to exit

market, decreasing industry output



Market Signals and the Economy Market signal

Price changes that cause firms to change theirproduction to more closely match consumerdemand No single person or government agency

directs this process This is what Adam Smith meant when he

suggested that individual decision makers act for

the overall benefit of society Even though, as individuals, they are merely trying to

satisfy their own desires As if guided by an invisible hand

Perfect Compitition

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