Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
Perfect Competition
Md. Moudud Hasan Saikot
Lecturer, Department of Economics
IUBAT
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Perfect Competition market, Summaries of Economics
Md. Moudud Hasan Saikot Lecturer, Department of Economics IUBAT
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Perfect Competition
Md. Moudud Hasan Saikot
Lecturer, Department of Economics
IUBAT
§ Define a perfectly competitive market,
and explain why a perfect competitor
faces a horizontal demand curve.
1. Explain how a perfect competitor
decides how much to produce.
2. Use graphs to show a firm’s profit or
loss.
Learning Objectives
Market structures
▪ Economists group industries into four
market structures:
● Perfect competition
● Monopolistic competition
● Oligopoly
● Monopoly
The four market structures: Table 7.
Characteristic Perfect Competition
Number of
firms
A Large
Type of
product
Identical
Ease of
entry
High
Examples of
industries
▪Apples ▪Wheat
The four market structures: Table 7.
Characteristic Perfect Competition
Monopolisitic Competition
Oligopoly
Number of
firms
A Large Many Few
Type of
product
Identical Differentiated Identical or
differentiated
Ease of
entry
High High Low
Examples of
industries
▪Apples ▪Wheat
▪Selling DVDs ▪Restaurants
▪Manufacturing computers ▪Manufacturing cars
The four market structures: Table 7.
Characteristic Perfect Competition
Monopolisitic Competition
Oligopoly Monopoly
Number of
firms
A Large Many Few One
Type of
product
Identical Differentiated Identical or
differentiated
Unique
Ease of
entry
High High Low Entry
blocked
Examples of
industries
▪Apples ▪Wheat
▪Selling DVDs ▪Restaurants
▪Manufacturing computers ▪Manufacturing cars
▪Letter delivery ▪Tap water
Perfectly competitive market
▪ Perfectly competitive market: A
market that meets the conditions of:
1. Many buyers and sellers, all of whom
are small relative to the market.
2. All firms selling identical products.
3. There are no barriers to new firms
entering the market.
Perfectly competitive market
A perfectly competitive firm cannot affect
the market price
▪ Price taker: A buyer or seller that is unable
to affect the market price.
▪ The demand curve for a price taker is
horizontal, or perfectly elastic.
▪ Profit: Total revenue (TR) minus total
cost (TC).
Profit = TR - TC
How a firm maximises profit in a
perfectly competitive market
(b) Demand for an individual farmer’s oats
0
(a) Market for oats
Quantity of oats (bushels per year)
Supply of oats
Demand for oats
$
Demand for Farmer Jones’s oats
Market demand and individual firm demand:
Figure 7.
- …which must be accepted by Farmer Jones and every other seller of oats.
80 000 000
Price of oats (dollars per bushel)
Price of oats (dollars per bushel)
Quantity of oats (bushels per year)
0 7500
$
- The intersection of market supply and market demand determines the equilibrium price of oats...
Revenue for a firm in a perfectly
competitive market: Farmer Jones’s
revenue: Table 7.
Determining the profit-maximising level of
output.
▪ Since producers in a perfectly competitive market
can sell as much produce as they wish to at the same constant price:
▪ Average revenue (AR) = Marginal revenue (MR) ▪ Price = AR = MR
How a firm maximises profit in a perfectly competitive market
Farmer Jones’s profits from oats
farming: Table 7.
Hubbard, Garnett, Lewis and O’Brien:Hubbard, Garnett, Lewis and O’Brien: Essentials of EconomicsEssentials of Economics © 2010 Pearson Australia© 2010 Pearson Australia