Perfect Competition: P Sivakumar

Perfect Competition
P sivakumar Economics Faculty INC-Coimbatore
Market
Market is a place where buyers and seller gather in order to buy and sell a particular goods or commodity. It is not restricted to a building, place or area. Kinds of Market
Perfect Competition Monopoly Monopolistic Competition Oligopoly
Perfect Competition
a) large number of buyers and sellers b) product homogeneity c) free exit and entry of firms d) profit maximization e) no government regulation f) perfect mobility of factors of production g) perfect knowledge h) absence of transport cost
Supply and Demand in Perfect Competition

Industry Y D E S Y Price P D Quantity X O X Quantity AR = MR Firm
Price
P
S O
Demand curve of perfect competition

The demand curve in perfect competition is infinitely elasticity which indicates that the firm can sell any amount of output at the prevailing market price.
P AR =MR
o output
Equilibrium conditions

MC = MR MC should cut MR from below If the above two conditions fulfilled then firm said to be in equilibrium
Short run Equilibrium

TR & TC Method
In this method a firm is in equilibrium when it maximizes its profit, defined as the difference between total cost and total revenue.
TC TR Max of profit loss Loss
Xa
Xe
Xb
Short Run Equilibrium of the Firms
Super Normal Profit when AR>SAC Normal Profit when AR=SAC Minimum Loss when AR=SAVC but AR<SAC
Measuring Profit if P > ATC

price ATC
MC d = MR profit
Quantity
Measuring Loss if P < ATC

price
MC
ATC loss d = MR Quantity
Marginal revenue & marginal cost method

In the short run firm can earn normal profit, super normal profit and also losses.
MC MC AC p e
AR=MR
MC AC p p1 e
AR=MR
AC
e1
p1 p e
e1
Industry equilibrium in the short run

Given the market demand and the market supply the industry is in equilibrium at that price at which the quantity demanded is equal to the quantity supplied. s
d Mc Ac p1 e1 e Mc Ac e
p p1
e
e1
p
d q
s q1 q2
Long run equilibrium of industry

The industry is in equilibrium in the long run when price is reached at which all firms are in equilibrium. The industry produces at the minimum point of LAC curve and makes only normal profit.
d s p
SAC
SMC
LMC
LAC
s
o Q
d
o X
Shut Down cost / Pricing
In short run the firm may continue its production process, even if it incurs loss The maximum amount of loss that the firm is willing to bear in the short run equal to the total fixed costs When a firm fails to recover its total variable costs, the firm will stop its production
Short-Run Supply Under Perfect Competition

(a)
Dollars ATC $3.50 2.50 2.00 1.00 0.50 MC d1=MR1 d2=MR2 d3=MR3 d4=MR4 d5=MR5 Bushels 1,000 4,000 7,000 per Year 2,000 5,000
(b)
Price per
Bushel
Firm's Supply
Curve
$3.50 2.50 2.00 1.00 0.50 2,000 4,000 5,000

Bushels 7,000 per Year
AVC
Deriving The Market Supply Curve

1. At each price . . . 3.The total supplied by all firms at different prices is the market supply curve.
Firm
Price per Bushel $3.50 2.50 2.00 1.00 0.50 Firm's Supply Curve Price per Bushel $3.50 2.50 2.00 1.00 0.50
Market Market Supply Curve
2,000 4,000 7,000 Bushels per Year 5,000 2. the typical firm supplies the profit-maximizing quantity.
400,000 700,000 Bushels per Year 200,000 500,000
IN THE LONG RUN
When demand increases from D0 to D1, entry occurs and the market supply curve shifts from S0 to S1. The long-run market supply curve, LSA, is horizontal.
13.3 IN THE LONG RUN
When demand increases from D0 to D2, entry occurs and the market supply curve shifts from S0 to S2. The long-run market supply curve, LSB, is upward slopingexternal diseconomies.
13.3 IN THE LONG RUN
When demand increases from D0 to D3, entry occurs and the market supply curve shifts from S0 to S3. The long-run market supply curve, LSC, is downward slopingexternal economies.
Efficiency of Competitive markets

When allocation of resources results in maximum possible net benefit Properties of allocative efficency (a) Efficient allocation of resources among firms ( Equilibrium of production) (b) Efficient distribution of goods (Equilibrium of consumption) Efficient combinations of products (simultaneous Equi of production & consumption)
When an efficient allocation of resources have been attained, it is not possible to make any person in the society better-off without making someone else worse-off Any changes in the productive methods or further exchange of goods and services can not result in additional net gains if resources are efficiently allocated
MC MC ,P,Marginal benefit 15 10 5 A Marginal benefit o 50 75 B
Loves of bread per day
Efficient Output of a Good
The maximum price a buyer will pay for another unit of a good is called the marginal benefit of the good. The minimum price a seller will accept for making another unit available is its marginal cost.
The marginal benefit is assumed to decline with consumption of bread, while the marginal cost is assumed to increase. Net gain = MB > MC ( point B) producer better-off At point A consumers would be betteroff At point E mutual gains is possible
Effect of Taxes on Price and Quantity
Imposition of a Lump Sum Tax Imposition of a Profit Tax Imposition of a Specific Sales Tax
Imposition of a Lump Sum Tax

Increase in fixed cost Upward shift of AFC and AC curves AVC and MC do not affected In short run no effect on equilibrium In long run supply will decrease and price will increase
Imposition of a Profit Tax
Effects are same as those of a lump sum tax No effect on MC and short run equilibrium of the firm and industry In long run supply will decrease and price will increase
Imposition of a Specific Sales Tax

It affects MC curve of a firm Burden of tax on consumer depends on price elasticity of supply with given demand The more elastic supply, the higher burden of a specific tax on consumer and less the burden on the firm
Market supply is perfectly elastic entire tax burden goes to consumers Supply curve is negative one then imposition of specific tax results in an increase in price, which is greater than tax

Perfect Competition: P Sivakumar

Uploaded by

Copyright:

Available Formats

Perfect Competition: P Sivakumar

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Perfect Competition: P Sivakumar

Uploaded by

Copyright:

Available Formats

Perfect Competition

P sivakumar Economics Faculty INC-Coimbatore

Supply and Demand in Perfect Competition

Demand curve of perfect competition

Short run Equilibrium

Short Run Equilibrium of the Firms

Measuring Profit if P > ATC

Measuring Loss if P < ATC

Marginal revenue & marginal cost method

Industry equilibrium in the short run

Long run equilibrium of industry

Shut Down cost / Pricing

Short-Run Supply Under Perfect Competition

$3.50 2.50 2.00 1.00 0.50 2,000 4,000 5,000

Deriving The Market Supply Curve

Market Market Supply Curve

400,000 700,000 Bushels per Year 200,000 500,000

IN THE LONG RUN

13.3 IN THE LONG RUN

13.3 IN THE LONG RUN

Efficiency of Competitive markets

MC MC ,P,Marginal benefit 15 10 5 A Marginal benefit o 50 75 B

Loves of bread per day

Efficient Output of a Good

Effect of Taxes on Price and Quantity

Imposition of a Lump Sum Tax

Imposition of a Profit Tax

Imposition of a Specific Sales Tax

You might also like