4. Contents:
• Types of market
• Perfect competition introduction
• Characteristics
• Assumptions
• Efficiency
• Equilibrium of firm
• Short run
• Long run
• Criticism
• International trade
• U.S case study
5. Types of market:
Types of
market
According to
competition
According
to place
According
to product
According
to time
7. Introduction:
Perfect competition is a market structure
where many firms offer a homogeneous
product. Because there is freedom of
entry and exit and perfect information,
firms will make normal profits and
prices will be kept low by competitive
pressures.
8. Characteristics:
Large number of buyers
and sellers
Homogenous product
Free entry and exit of
firms
Perfectly elastic demand
9. Perfect knowledge of
consumers
Normal profits of firms
Price taker
No control over price
Perfect mobility of FOP
Characteristics(cont’d):
10. Assumptions:
Many suppliers (more than
100)
Price taker, significant market
share , no affect on price through
supply
Identical/perfect substitutes/
standardized output
11. All firms have equal access
to market
No barriers to entry & exit
of firms
No super normal profit
Perfect information
Assumptions(cont’d):
12. Firm as price taker:
The market price is where market demand is equal
to market supply. All firms will charge this price.
MC
P=AR=MR
Output
x
y
Revenue
&cost
E
MC=MR
A
B
Q
P
13. Efficiency of firms:
Efficient i.e. P=MC,
at equilibrium point
Productively efficient
Have to remain efficient,
otherwise out of business
Dynamically inefficient,
nothing to invest in R&D
21. Why normal profit? When TR=TC
It means firm does not earn
the profit above the estimated
profit. As in Economics the
estimated profit is added in cost
so when it is said that TR=TC,
that does not result in zero profit.
24. On average normal profit in
long run:
P=AR=MR
Output
x
y
MC=MR
Q
P
AC
TR=TC
E
MC
Revenue
&cost
25. Criticism:
If all firms are price takers,
who is price maker?
Very few markets or industries
in the real world are perfectly competitive
How homogeneous is the output of real firms?
Differences between supply and demand cause
changes in price, not true for short run.
27. Case study: U.S watches demand
and supply
Qd & Qs
x
y
Price
E
$15P
Q
U.S
demand
U.S
supply
15M
20M
25M
$12.50
<----------Imports------->
Free trade
28. Solution to problem:
If U.S government imposes a
tariff (12%) then price will
increase from $12.50 to $14.
12.50 x 12% = $1.5 + $12.50 = $14 (new price)
As a result the supply increases and the quantity
demanded decreases. Now the U.S govt. will
have to import only 4 Million of watches.
30. Trying to do what your competitors are doing
but basically a little bit better is probably not
going to be the winning strategy. The problem
is finding what your competitors wouldn't
even consider doing.
Ending quote
