Tài liệu Perfect Competition ppt

© 2003 McGraw-Hill Ryerson Limited.
Perfect Competition
Perfect Competition
Chapter 11
Chapter 11
© 2003 McGraw-Hill Ryerson Limited.
11 - 2
Laugher Curve
Laugher Curve
Q. How many economists does it take to
screw in a light bulb?
A. Eight.
One to screw it in and seven to hold
everything else constant.
© 2003 McGraw-Hill Ryerson Limited.
11 - 3
Perfect Competition
Perfect Competition

The concept of competition is used in
two ways in economics.

Competition as a process is a rivalry
among firms.

Competition as a market structure.
© 2003 McGraw-Hill Ryerson Limited.
11 - 4
Competition as a Process
Competition as a Process


Competition involves one firm trying to
take away market share from another
firm.

As a process, competition pervades the
economy.
© 2003 McGraw-Hill Ryerson Limited.
11 - 5
A Perfectly Competitive
A Perfectly Competitive
Market
Market

A perfectly competitive market is one
which has highly restrictive
assumptions, but which provides us
with a reference point we can use in
comparing different markets.
© 2003 McGraw-Hill Ryerson Limited.
11 - 6
A Perfectly Competitive
A Perfectly Competitive
Market
Market

In a perfectly competitive market:

The number of firms is large.

The firms' products are identical.


There is free entry and exit, that is, there
are no barriers to entry.

There is complete information.

Firms are profit maximizers.

Both buyers and sellers are price takers.
© 2003 McGraw-Hill Ryerson Limited.
11 - 7
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition

The number of firms is large.

Large number of firms means that any one
firm's output is very small when
compared with the total market.

What one firm does has no bearing on
market quantity or market price.
© 2003 McGraw-Hill Ryerson Limited.
11 - 8
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition


Firms' products are identical.

This requirement means that each firm's output is
indistinguishable from any other firm’s output.

Firms sell homogeneous product.
© 2003 McGraw-Hill Ryerson Limited.
11 - 9
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition

There is free entry and free exit.

Firms are free to enter a market in response
to market signals such as price and profit.

Barriers to entry are social, political, or
economic impediments that prevent other
firms from entering the market.
© 2003 McGraw-Hill Ryerson Limited.
11 - 10
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition

There is free entry and free exit.


Technology may prevent some firms from
entering the market.

There must also be free exit, without
incurring a loss.
© 2003 McGraw-Hill Ryerson Limited.
11 - 11
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition

There is complete information.

Firms and consumers know all there is to
know about the market – prices, products,
and available technology.

Any technological advancement would be
instantly known to all in the market.
© 2003 McGraw-Hill Ryerson Limited.
11 - 12
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition

Firms are profit maximizers.


The goal of all firms in a perfectly
competitive market is profit and only
profit.

There is no non-price competition (based
on quality, brand name, or the like).
© 2003 McGraw-Hill Ryerson Limited.
11 - 13
The Necessary Conditions
The Necessary Conditions
for Perfect Competition
for Perfect Competition

Both buyers and sellers are price
takers.

A price taker is a firm or individual who
takes the market price as given.

Neither supplier nor buyer possesses
market power.
© 2003 McGraw-Hill Ryerson Limited.
11 - 14
The Definition of Supply
The Definition of Supply
and Perfect Competition
and Perfect Competition

Supply is a schedule of quantities of
goods that will be offered to the market

at various prices.
© 2003 McGraw-Hill Ryerson Limited.
11 - 15
The Definition of Supply
The Definition of Supply
and Perfect Competition
and Perfect Competition

This definition of supply requires the
supplier to be a price taker.
© 2003 McGraw-Hill Ryerson Limited.
11 - 16
The Definition of Supply
The Definition of Supply
and Perfect Competition
and Perfect Competition

Because of the definition of supply, if
any of the conditions required for
perfect competition are not met, the
formal definition of supply disappears.
© 2003 McGraw-Hill Ryerson Limited.
11 - 17
The Definition of Supply
The Definition of Supply
and Perfect Competition
and Perfect Competition

That the number of suppliers be large
means that they do not have the ability

to collude (act together with other firms
to control price or market share).
© 2003 McGraw-Hill Ryerson Limited.
11 - 18
The Definition of Supply
The Definition of Supply
and Perfect Competition
and Perfect Competition

Other conditions make it impossible for
any firm to forget about the hundreds of
other firms waiting to replace their
supply.

A firm's goal is specified by the
condition of profit maximization.
© 2003 McGraw-Hill Ryerson Limited.
11 - 19
The Definition of Supply
The Definition of Supply
and Perfect Competition
and Perfect Competition

Even if the conditions for a perfectly
competitive market are not met, supply
forces are still strong and many of the
insights of the competitive model can be
applied to firm behavior in other market
structures.
© 2003 McGraw-Hill Ryerson Limited.

11 - 20
Demand Curves for the Firm
Demand Curves for the Firm
and the Industry
and the Industry

The demand curve facing the firm is
different from the industry demand
curve.

A perfectly competitive firm’s demand is
horizontal (perfectly elastic), even
though the demand curve for the
industry is downward sloping.
© 2003 McGraw-Hill Ryerson Limited.
11 - 21
Demand Curves for the Firm
Demand Curves for the Firm
and the Industry
and the Industry

Each firm in a competitive industry is so
small that it does not need to lower its
price in order to sell additional output.
© 2003 McGraw-Hill Ryerson Limited.
11 - 22
Market supply
Market
demand
1,000 3,000

Price
$10
8
6
4
2
0
Quantity
Market Firm
Individual
firm demand
Market Demand Curve Versus
Market Demand Curve Versus
Individual Firm Demand Curve,
Individual Firm Demand Curve,
Fig 11-1(a and b), p 236
Fig 11-1(a and b), p 236
10 20 30
Price
$10
8
6
4
2
0
Quantity
A B C
© 2003 McGraw-Hill Ryerson Limited.
11 - 23
The Profit-Maximizing Level

The Profit-Maximizing Level
of Output
of Output

The goal of the firm is to maximize
profits.

When it decides what quantity to
produce it continually asks how
changes in quantity would affect its
profit.
© 2003 McGraw-Hill Ryerson Limited.
11 - 24
Profit-Maximizing Level of
Profit-Maximizing Level of
Output
Output

Since profit is the difference between
total revenue and total cost, what
happens to profit in response to a
change in output is determined by
marginal revenue (MR) and marginal
cost (MC).

A firm maximizes profit when MC = MR.
© 2003 McGraw-Hill Ryerson Limited.
11 - 25
Profit-Maximizing Level of
Profit-Maximizing Level of

Output
Output

Marginal revenue (MR) is the change
in total revenue associated with a
change in quantity.

Marginal cost (MC) is the change in
total cost associated with a one unit
change in quantity.