Perfect Competition

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Perfect Competition
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Assumptions

• Infinite numbers of small buyers and sellers
• Perfect information
• Products are homogenous
• No transport/transaction costs
• All producers have access to the same technology
• No barriers to entry or exit
• All factors of production are perfectly mobile

3
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 - 475 -
2 690
3 840
4 950
5 1060
6 1200
7 1400
8 1700
9 2150
10 2780
4
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 - 475 -
2 200 690
3 200 840
4 200 950
5 200 1060
6 200 1200
7 200 1400
8 200 1700
9 200 2150
10 200 2780
5
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 200 - 475 -
2 200 400 690
3 200 600 840
4 200 800 950
5 200 1000 1060
6 200 1200 1200
7 200 1400 1400
8 200 1600 1700
9 200 1800 2150
10 200 2000 2780
6
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 200 - 475 -
2 200 400 200 690
3 200 600 200 840
4 200 800 200 950
5 200 1000 200 1060
6 200 1200 200 1200
7 200 1400 200 1400
8 200 1600 200 1700
9 200 1800 200 2150
10 200 2000 200 2780
7
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 200 - 475 475 -
2 200 400 200 690 345
3 200 600 200 840 280
4 200 800 200 950 238
5 200 1000 200 1060 212
6 200 1200 200 1200 200
7 200 1400 200 1400 200
8 200 1600 200 1700 213
9 200 1800 200 2150 239
10 200 2000 200 2780 278
8
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 200 - 475 475 -
2 200 400 200 690 345 215
3 200 600 200 840 280 150
4 200 800 200 950 238 110
5 200 1000 200 1060 212 110
6 200 1200 200 1200 200 140
7 200 1400 200 1400 200 200
8 200 1600 200 1700 213 300
9 200 1800 200 2150 239 450
10 200 2000 200 2780 278 630
9
Calculate and plot the following
No Units AR TR MR TC ATC M C Profit
1 200 200 - 475 475 - -275
2 200 400 200 690 345 215 -290
3 200 600 200 840 280 150 -240
4 200 800 200 950 238 110 -150
5 200 1000 200 1060 212 110 -60
6 200 1200 200 1200 200 140 0
7 200 1400 200 1400 200 200 0
8 200 1600 200 1700 213 300 -100
9 200 1800 200 2150 239 450 -350
10 200 2000 200 2780 278 630 -780
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Plot MC, AC and AR
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Plot MC, AC and AR
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Plot MC, AC and AR
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Plot MC, AC and AR
Remember Marginal values are always plotted at
the midpoints
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Market
The Perfect Competition Diagram
Firm
MC
Cost/ Rev
The market price and quantity is set by the
normal forces of demand and supply
Price
Firms under perfect competition are price takers
and so must accept the ruling market price
AC
S
MR D AR
P
As a result, the firms demand curve is perfectly
elastic
D
The firm will profit maximise by producing where
MRMC. In this case it will leave the firm with
NO PROFIT
Qpc
Quantity
Quantity
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The Perfect Competition Diagram
Firm
Market
This abnormal profit acts as a signal to
entrepreneurs who are able to enter the market
freely due to lack of entry barriers. This
shifts the supply curve out and lowers the market
price.
MC
Cost/ Rev
If costs fall firms still maximise profits at
MRMC but can now make ABNORMAL profits
Price
AC
S
S1
MR D AR
P
D
Being a price taker (because of the assumptions
of homogeneity and perfect information) the firm
must lower its prices. As a result of this
abnormal profits are only ever short run under PC.
Quantity
Quantity
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Implications

• No producer or consumer is large enough to
  influence the market price (they are price
  takers)
• ARAC No firm can make abnormal profit in the
  long run
• MCMR Firms profit maximise
• Min AC Firms must be allocatively and
  productively efficient
• There will be no RD (perfect information and no
  abnormal profit)
• There are no differentiated products
• There may not be dynamic efficiency in the long
  run.