Copyright 2013 N.S. Market Structure (4.1.2)

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Ralf Randell Oliver
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2 Spectrum of Competition Directions: 1) Cut this sheet in half on the dotted line. 2) On the bottom, write whatever information you know about each market. 3) Cut out the different markets from the bottom portion on the dotted lines. 4) Glue these markets into the empty box on the top portion. Glue them in order from the Most Competitive market to the Least Competitive market. Most Competitive Least Competitive See Answers

3 Spectrum of Competition Directions: 1) Cut this sheet in half on the dotted line. 2) On the bottom, write whatever information you know about each market. 3) Cut out the different markets from the bottom portion on the dotted lines. 4) Glue these markets into the empty box on the top portion. Glue them in order from the Most Competitive market to the Least Competitive market. Most Competitive Least Competitive PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY The focus today is just on Perfect Competition.

5 Perfect Competition Targets Knowledge 1 Reasoning 1 Understand the definition and characteristics of a market that is in perfect competition. Describe the difference between the shortrun and long-run industry supply curves.

6 What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. Consumers Equilibrium Price Producers

7 What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. 2) This means that neither consumers nor producers can do anything to change price. Consumers Equilibrium Price Producers

8 What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. 2) This means that neither consumers nor producers can do anything to change price. Consumers Equilibrium Price Producers 3) Consumers rarely affect price, so we will focus on the producer.

9 What Is Perfect Competition? 1) In perfect competition, all consumers and producers are price takers. 2) This means that neither consumers nor producers can do anything to change price. 3) Consumers rarely affect price, so we will focus on the producer. 4) The supply and demand model is a model of a perfectly competitive market. Equilibrium Price Producers

10 The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist.

11 The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers.

12 The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share.

13 The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share. C) This means no seller can produce more than a small fraction of the total market supply.

14 The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share. C) This means no seller can produce more than a small fraction of the total market supply. 2) Standardized Product A) Consumers must regard all products to be identical. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

15 The Two Main Characteristics There are two conditions necessary for a perfectly competitive market to exist. 1) Numerous Sellers A) Generally there are hundreds or even thousands of sellers. B) No seller can have a large market share. C) This means no seller can produce more than a small fraction of the total market supply. 2) Standardized Product A) Consumers must regard all products to be identical. B) They do not have to be identical, consumers just have to think they are. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

16 Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets.

17 Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets. 1) Free Entry and Exit It must be easy for new firms to open a new business in the market.

1) Free Entry and Exit It must be easy for new firms to open a new business in the

18 Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets. 1) Free Entry and Exit It must be easy for new firms to open a new business in the market. 2) Perfect Information Firms and consumers have complete information about price, quality, and production methods.

19 Other Characteristics Although not necessary, these other characteristics are often present in perfectly competitive markets. 1) Free Entry and Exit It must be easy for new firms to open a new business in the market. 2) Perfect Information Firms and consumers have complete information about price, quality, and production methods. 3) No Long-Run Economic Profit Any profits being earned would cause other firms to enter the market.

20 Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed.

21 Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. Name $1 $2 $3 $4 $5 Tim Ben Kate These three farmers each produce bushels of corn. Notice how each farmer has his/her own individual supply schedule.

22 Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. 2) The sum of all individual supply curves in a market is the industry supply curve. Name $1 $2 $3 $4 $5 Tim Ben Kate TOTAL This final row represents the industry supply curve.

23 Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. 2) The sum of all individual supply curves in a market is the industry supply curve. 3) Under perfect competition, output is determined by demand and the equilibrium price. Name $1 $2 $3 $4 $5 Tim Ben Kate TOTAL D S

24 Short Run Industry Supply Curve In the short run, the number of firms in the market is fixed. 1) Each firm has its own individual supply curve. 2) The sum of all individual supply curves in a market is the industry supply curve. 3) Under perfect competition, output is determined by demand and the equilibrium price. Name $1 $2 $3 $4 $5 Tim Ben Kate TOTAL ) Because the number of firms is fixed, profit can be made in the short run. S D

25 Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. D S 1 This market is currently in short run equilibrium.

26 Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. S 1 S 2 D The new equilibrium is $3 with a quantity of 15.

27 Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. 2) When supply increases, output rises and price drops. S 1 S 2 D The new equilibrium is $3 with a quantity of 15.

28 Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. 2) When supply increases, output rises and price drops. 3) This will continue to happen until no firm makes a profit. D S 1 S 2 S 3 In this market, if $2 is the break even price, no more firms will enter because profit is now $0. The market is now in long run equilibrium.

Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market.

29 Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. 2) When supply increases, output rises and price drops. 3) This will continue to happen until no firm makes a profit. 4) Since there is no profit, perfect competition produces the most efficient allocation of resources. S 1 S 2 S 3 In this market, if $2 is the break even price, no more firms will enter because profit is now $0. The market is now in long run equilibrium. D

30 Long Run Industry Supply Curve Let s say, however, that the firms in a perfectly competitive market are making a profit in the short run. It will attract new firms to enter the market. 1) When new firms enter, it increases supply. 2) When supply increases, output rises and price drops. 3) This will continue to happen until no firm makes a profit. Short Run Supply Long Run Supply 4) Since there is no profit, perfect competition produces the most efficient allocation of resources. 5) The long run industry supply curve is always flatter (more elastic) than the short run. The LRS is always flatter than the SRS because firms are able to freely enter and exit the market in the long run.

31 Is This Perfect Competition? DIRECTIONS Several markets are listed below. Use the characteristics of perfect competition to decide whether each market is perfectly competitive or not. There are questions for each characteristic of perfect competition for each market. (a) (b) (c) Complete this version if you feel you need the teacher to work with you on this topic. Complete this version if you feel you have a fairly good understanding of this topic. Complete this version if you feel this topic is easy.

32 Perfect Competition Targets Knowledge 1 Reasoning 1 Understand the definition and characteristics of a market that is in perfect competition. Describe the difference between the shortrun and long-run industry supply curves.

33 Resources

Unit 6 Perfect Competition and Monopoly - Practice Problems

Unit 6 Perfect Competition and Monopoly - Practice Problems Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One characteristic of a perfectly competitive