Perfect Compettion

7/21/2019 Perfect Compettion

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Perfect Competition

P sivakumar Economics Faculty

INC-Coimbatore





MarketMarket is a place where buyers and

seller gather in order to buy and

sell a particular goods orcommodity. It is not restricted to abuilding, place or area.

Kinds of MarketPerfect

CompetitionMonopoly

MonopolisticCompetition

Oligopoly



Perfect Competitiona) large number of buyers and sellers b) product homogeneity

c) free exit and entry of rms d) prot maximiation e) no go!ernment regulation f) perfect mobility of factors of production

g) perfect knowledge h) absence of transport cost



"upply and #emand inPerfect Competition

$% &M%

' (

*uantity

Price

P

Price

' (

*uantity

P+

"#

" #

Industry irm



#emand cur!e of perfect

competition -he demand cur!e in perfect

competition is innitely elasticity

which indicates that the rm cansell any amount of output at thepre!ailing market price.

P AR =MR

o

output



+uilibrium conditions MC & M%

MC should cut M% from below

If the abo!e two conditions fullledthen rm said to be in euilibrium



"hort run +uilibrium -% / -C Method

In this method a rm is in euilibrium when

it maximies its prot, dened as thedi0erence between total cost and totalre!enue.

O

TRTC

Xa XeXb

Max

ofprofit

loss

Loss



"hort %un +uilibrium

of the irms "uper 1ormal Prot

when $%2"$C

1ormal Prot

when $%&"$C

Minimum 3osswhen $%&"$4C but $%5"$C



Measuring Prot if P 2 $-C

d = MR

MC

ATC

Quantity1 2 ! " # $ %

price

prot



Measuring 3oss if P 5 $-C

MC

ATC

d = MR

&uantity

price

1 2 ! " # $ %

loss



Marginal re!enue / marginal

cost methodIn the short run rm can earn normal prot,

super normal prot and also losses.

MC

AC

AR=MR

e

o

p

'

AR=MR

AC

MC

ep

p1 e1

'o

MC AC

e1

ep

p1

o '



Industry euilibrium in the

short run6i!en the market demand and the

market supply the industry is in

euilibrium at that price at which theuantity demanded is eual to theuantity supplied.

s(

(s

e

''1 '2

ee

e1

p p

p1

p1

e1

p

AcMc Mc Ac



3ong run euilibrium of

industry -he industry is in euilibrium in the long run

when price is reached at which all rms are ineuilibrium. -he industry produces at theminimum point of 3$C cur!e and makes onlynormal prot.

s

(

s (

p

o&

LAC

)AC

LMC

)MC

Xo



"hut #own cost 7 Pricing In short run the rm may continue its

production process, e!en if it incurs

loss -he maximum amount of loss that

the rm is willing to bear in the shortrun eual to the total xed costs

8hen a rm fails to reco!er its total!ariable costs, the rm will stop itsproduction



"hort9%un "upply :nder PerfectCompetition

*+"*

1,***

2,***

!,***

",***

$,***

1+**

2+**

-+"*

2+"*

MC ATC

d 1=MR

1

AVC

(a)

.irm/s )upplyCur0e

*+"*

2,***!,***

",***

$,***

1+**

2+**

-+"*

2+"*

(b)

d 2 =MR

2

d 3=MR

3

d 4=MR

4

d 5 =MR

5

Bushelsper Year

Dollars Price perBushel

Bushelsper Year



#eri!ing -he Market "upply Cur!e

*+"*

1+**

2+**

-+"*

2+"*

Maret )upplyCur0e

2**,***!**,***

"**,***$**,***

.irm/s )upply Cur0e

*+"*

2,*** !,***",***

$,***

1+**

2+**

-+"*

2+"*

1+ At eac price + + ++Te total supplie( by all firms at (ifferent

prices is te maret supply cur0e+

Firm Market

Bushelsper Year

Price perBushel

Price perBushel

Bushelsper Year

2+ te typical firm supplies teprofit3maximi4ing 'uantity+



I1 -;+ 3'16 %:1

5en (eman( increases from D* to D1, entry occurs an( te

maret supply cur0e sifts from S * to S 1+ Te long3run maret

supply cur0e, LS A, is ori4ontal+



<=.= I1 -;+ 3'16 %:1

5en (eman( increases from D* to D2, entry occurs an( te

maret supply cur0e sifts from S * to S 2+ Te long3run maret

supply cur0e, LS B, is up6ar( sloping7external (iseconomies+



<=.= I1 -;+ 3'16 %:1

5en (eman( increases from D* to D, entry occurs an( te

maret supply cur0e sifts from S * to S + Te long3run maret

supply cur0e, LS C , is (o6n6ar( sloping7external economies+



Eciency ofCompetitive markets

Wen allocation of resources results inma!imum possible net bene"t

Properties of allocative ecency

#a$ Ecient allocation of resources amon%"rms # E&uilibrium of production$

#b$ Ecient distribution of %oods#E&uilibrium of consumption$

'Ecient combinations of products#simultaneous E&ui of production (consumption$



Wen an ecient allocation ofresources ave been attained) it is

not possible to make any person inte society better-o* +itoutmakin% someone else +orse-o*

,ny can%es in te productive

metods or furter e!can%e of%oods and services can not resultin additional net %ains if resourcesare eciently allocated



o

MC )P)Mar%inal bene"t

MC

Marginal benet

$

>

+

<?

<@

?

?@ A?

3o!es of bread per day



+Bcient 'utput of a 6ood

-he maximum price a buyer willpay for another unit of a good is

called the marginal benet of thegood.

-he minimum price a seller will

accept for making another unita!ailable is its marginal cost.



e mar%inal bene"t is assumed todecline +it consumption of bread)

+ile te mar%inal cost is assumedto increase. Net %ain / M0 1 MC # point 0$

producer better-o*

,t point , consumers +ould bebetter-o* ,t point E mutual %ains is possible



+0ect of -axes on Priceand *uantity

Imposition of a 3ump

"um -ax Imposition of a Prot -ax

Imposition of a "pecic"ales -ax



Imposition of a 3ump "um -ax

Increase in xed cost

:pward shift of $C and $C cur!es

$4C and MC do not a0ected

In short run no e0ect on

euilibrium In long run supply will decrease

and price will increase



Imposition of a Prot -ax

+0ects are same as those of alump sum tax

1o e0ect on MC and short runeuilibrium of the rm andindustry

In long run supply will decreaseand price will increase



Imposition of a "pecic"ales -ax

It a0ects MC cur!e of a rm

>urden of tax on consumer depends

on price elasticity of supply withgi!en demand

-he more elastic supply, the higher

burden of a specic tax onconsumer and less the burden onthe rm



Market supply is perfectly elastic entire tax burden goes to

consumers "upply cur!e is negati!e one then

imposition of specic tax results in

an increase in price, which isgreater than tax







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Perfect Compettion