Topic4 1-PerfectCompetition

Topic 4.
1
Market Structure:
Perfect Competition,
Features of the four market structures
ForeignExchange
Doctors
Soft Drink
Railways
ALTERNATIVE MARKET STRUCTURES

Classifying markets by degree of
competition
number of firms
freedom of entry to industry
nature of product
nature of demand curve
The four market structures

perfect competition
monopoly
monopolistic competition
Oligopoly
Monopsony will add this year
Structure conduct performance
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Less Competitive
More Competitive
Market Structure
Market
Product
Perfect
Competitio
n
Homogenous
Monopolisti
c
Competitio
n
Differentiated
Oligopoly
Monopoly
Homogenous,
Differentiated
Homogenous
No. of
Firms
Many
Many
Few
One
Market will be served

Rule of Thumb:
Number of Firms
--------------------------Number of Firms + 1
Market - Optimality
Demand Curve downward
sloping in all markets
50
100
PERFECT COMPETITION
Assumptions
Many buyers and sellers
Firms (sellers) and buyers are price takers
freedom of entry
Product is homogeneous - identical products
perfect knowledge
Example: Stock Market, ForEx Market,

Bullion, Agricultural markets
Short-run equilibrium of the firm
P = MC
Short-run equilibrium of industry and firm under

perfect competition
P
Rs
S
Pe
D
O
O
Q (millions)
(a) Industry

perfect competition
P
Rs
S
D = AR
P = MR
AR
Pe
D
O
O
Q (millions)
(a) Industry
Q (thousands)
(b) Firm

perfect competition
P
Rs
MC
D = AR
= MR
AR
Pe
D
O
O
Q (millions)
(a) Industry
Qe
Q (thousands)
(b) Firm
PERFECT COMPETITION
P = MC
possible supernormal profits

perfect competition
P
Rs
MC
D = AR
= MR
AR
AC
Pe
D
O
O
Q (millions)
(a) Industry
AC
Qe
Q (thousands)
(b) Firm

perfect competition
P
Rs
MC
D = AR
= MR
AR
AC
Pe
D
O
O
Q (millions)
(a) Industry
AC
Qe
Q (thousands)
(b) Firm
Perfect Competition:
Short-Run Equilibrium
Firms Demand Curve = Market Price =
= Average Revenue = Marginal Revenue
Firms Supply Curve = Marginal Cost
where Marginal Cost > Average Variable Cost
PERFECT COMPETITION
P = MC
possible supernormal profits
short-run supply curve of firm
Deriving the short-run supply curve
Rs
MC
a
P1
D1 = MR1
D1
O
Q (millions)
(a) Industry
Q1
Q (thousands)
(b) Firm
Rs
MC
a
P1
P2
D1 = MR1
D2 = MR2
D1
D2
O
O
Q (millions)
(a) Industry
Q2
Q (thousands)
(b) Firm
Rs
MC
a
P1
P2
P3
D1 = MR1
D2 = MR2
D3 = MR3
D1
D3
O
D2
O
Q (millions)
(a) Industry
Q3
Q (thousands)
(b) Firm
Rs
S
a
P1
P2
P3
D1 = MR1
D2 = MR2
D3 = MR3
D1
D3
O
D2
O
Q (millions)
(a) Industry
Q (thousands)
(b) Firm
PERFECT COMPETITION
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away
Perfect Competition:
Long-Run Equilibrium
Quantity is set by the firm so that short-run:
Price = Marginal Cost = Average Total Cost
Economic Profit < or > 0
At the same quantity, long-run:
Price = Marginal Cost = Average Cost
Economic Profit = 0
Long-run equilibrium under perfect competition
S1
Rs
LRAC
P1
AR1
D1
D
O
O
Q (millions)
(a) Industry
Q (thousands)
(b) Firm
Long-run equilibrium under perfect competition

The Dynamics
P
Rs
S1
Se
LRAC
P1
AR1
D1
PL
ARL
DL
D
O
O
Q (millions)
(a) Industry
QL
Q (thousands)
(b) Firm
Long-run equilibrium of the firm under perfect competition

(SR)MC
Price
(SR)AC
LRAC
DL
AR = MR = SRMC = LRMC = LRAC
Long-run equilibrium of the firm under perfect competition

Rs
(SR)MC
(SR)AC
LRAC
DL
AR = MR
LRAC = (SR)AC = (SR)MC = MR = AR
Perfect Competition
Price Determination
QD 625 5P
QS 175 5 P
QD QS
Perfect Competition:Price Determination
625 5 P 175 5 P
450 10P
P $45
QD 625 5P 625 5(45) 400
QS 175 5P 175 5(45) 400
Competition in the
Global Economy
t
es
m
o
D
u
S
c
l
pp
World Supply
Do
me
sti
c
De
ma
n
Ref: MIT Handout
Competition in the Global Economy

Foreign Exchange Rate
Price of a foreign currency in terms of the
domestic currency
Depreciation of the Domestic Currency

Increase in the price of a foreign currency
relative to the domestic currency
Appreciation of the Domestic Currency

Decrease in the price of a foreign
currency relative to the domestic currency
Competition in the Global Economy

R = Exchange Rate = Rupee Price of Dollar
R = Rs/$
Supply of Dollars
Demand for Dollars
Million $ per day
PERFECT COMPETITION
Short-run supply curve of industry
Long-run equilibrium of the firm
all supernormal profits competed away
Incompatibility of economies of scale with

perfect competition
PERFECT COMPETITION
Advantages of perfect competition
P = MC
production at minimum AC
only normal profits in long run
responsive to consumer wishes: consumer
sovereignty
competition efficiency
no point in advertising
PERFECT COMPETITION
Disadvantages of perfect competition
insufficient profits for investment
lack of product variety
lack of competition over product design and
specification

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Topic 4.

Features of the four market structures

ALTERNATIVE MARKET STRUCTURES

The four market structures

Structure conduct performance

Market will be served

Example: Stock Market, ForEx Market,

Short-run equilibrium of industry and firm under

Short-run equilibrium of industry and firm under

Short-run equilibrium of industry and firm under

Short-run equilibrium of industry and firm under

Short-run equilibrium of industry and firm under

Deriving the short-run supply curve

Deriving the short-run supply curve

Deriving the short-run supply curve

Deriving the short-run supply curve

Long-run equilibrium under perfect competition

Long-run equilibrium under perfect competition

Long-run equilibrium of the firm under perfect competition

Long-run equilibrium of the firm under perfect competition

LRAC = (SR)AC = (SR)MC = MR = AR

Perfect Competition:Price Determination

QD 625 5P 625 5(45) 400

QS 175 5P 175 5(45) 400

Ref: MIT Handout

Competition in the Global Economy

Depreciation of the Domestic Currency

Appreciation of the Domestic Currency

Competition in the Global Economy

Demand for Dollars

Million $ per day

Incompatibility of economies of scale with

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