Transcript Market Structure: Perfect Competition • Why study perfect competition? – Standard for comparison

Market Structure: Perfect
Competition
• Why study perfect competition?
– Standard for comparison
– More prevalent than you might think
Analyzing Market Structure
• What is the profit-maximizing output level?
• What is the profit-maximizing price?
• What role does cost play in determining
output and price?
Characteristics of a Market
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Number of buyers and sellers
Nature of the product
Degree of information available
Barriers to entry and exit
Perfect Competition: Price Takers
• Agriculture
– Farming
– Cattle ranching
• Long-haul trucking
• Local retail apparel
• Contract construction
What’s So Perfect about Perfect
Competition?
• Short-run resource allocation
– Mutually beneficial transactions
– Consumer surplus
• Long-run efficiency
– Produce at minimum LAC
Short-Run Equilibrium in Perfect
Competition
• Graphical representation
– Profit maximization
– Short-run supply curve
• Mathematical model
– TR - TC approach
– MR = MC approach
– Marginal profit = 0 approach
Long-Run Equilibrium in Perfect
Competition
• LRAC and LRMC
• Equilibrium at minimum LRAC
• Long-run industry supply curves
– Constant-cost industry
– Increasing-cost industry
– Decreasing-cost industry
Theory of Contestable Markets
• Generally speaking, actual number of firms
important
• Potential entry may be more important
• Actual number of firms may not matter
Characteristics of Monopolistic
Competition
• Many independently acting firms. No
collusion
• Products are close, but not perfect,
substitutes
• No barriers to entry or exit
• Imperfect information, bringing out the
possibility of advertising
Short-Run Equilibrium
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MR = MC
P > MC > ATC
Profit > 0
Graphical example
Long-Run Equilibrium
• Profit attracts rival firms
• Demand falls or prices rise to meet
challenge
• P = ATC, but still > MC
• Excess capacity
• Graphical example
Monopolistic Competition and
Perfect Competition: A
Comparison
• LR equilibriums
• Monopolistic competition
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Inefficient, excess capacity
Too many firms, too many brands
Too much selling expense
Spurious product differentiation