© 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 - 15 The Definition of Supply 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 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 ©... non-price competition (based on quality, brand name, or the like) © 2003 McGraw-Hill Ryerson Limited 11 - 13 The Necessary Conditions 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 and Perfect Competition. .. Conditions 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 for Perfect Competition Firms are profit maximizers The goal of all firms in a perfectly... © 2003 McGraw-Hill Ryerson Limited 11 - 17 The Definition of Supply 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 and Perfect Competition Other conditions make it impossible for any firm to forget about... 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 and the Industry The demand curve facing the firm is different from the industry demand curve A perfectly... quantity Marginal cost (MC) is the change in total cost associated with a one unit change in quantity © 2003 McGraw-Hill Ryerson Limited 11 - 26 Marginal Revenue Since a perfect competitor accepts the market price as given, for a perfectly competitive firm marginal revenue is equal to price (MR = P) © 2003 McGraw-Hill Ryerson Limited 11 - 27 Marginal Cost Initially, marginal cost falls and then begins... McGraw-Hill Ryerson Limited 11 - 20 Demand Curves for the Firm 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 and the Industry Each firm in a competitive . Ryerson Limited. 11 - 3 Perfect Competition Perfect Competition The concept of competition is used in two ways in economics. Competition as a process. Supply and Perfect Competition and Perfect Competition Because of the definition of supply, if any of the conditions required for perfect competition