perfect competitioin

2. Market Structures
A market can be defined as a group of firms willing
and able to sell a similar product or service to the
same potential buyers.
Market structure describes the important features of a
market, such as the number of suppliers, demanders,
the product’s degree of uniformity, the ease of entry
into the market, and the forms of competition among
firms.

3. Major features that determine
Market Structure
 Number of sellers/buyers
 Product differentiation
 Entry and exit conditions
 Form of competition

4. Classification of market
structures
There are four broad categories of market
structures –
1. Perfect competition
2. Monopoly
3. Monopolistic competition
4. Oligopoly

5. What we analyze in all Market
structures
AR, MR
AC, MC
The point where MR = MC ( Profit maximum )
Q* ( Equilibrium Output )
P* ( Equilibrium Price )

7. Perfectly
Competitive Market

8. Perfect competitive is a market structure where
there are many buyers & sellers and 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 determined by the
market force (supply and demand)

9. Characteristics of Perfectly
Competitive Market
Large number of buyers and sellers
Homogenous products
Both buyers and sellers are price takers
There are no barriers of entry
There is complete information.
Firms are profit maximizers

10. Large number of buyers and sellers
There must be so many buyers and sellers of the
product that each market participant is
insignificantly small in relation to the market. Thus
no individual buyer or seller can influence the
market price.

11. Homogenous products
All the goods sold in the specific market are
homogeneous, that is, identical. It makes no
difference to the buyer from whom or where he
or she buys the product.

12. Both buyers and sellers are price takers
The market price is determined by the market
forces, so no any consumer or supplier can not
affect the market price of goods through their
production and consumption decisions.

13. There are no barriers of entry
There is no government intervention to
influence buyers and sellers
There are no social forces such as ‘’bankers only
lending to certain people’’
There is no technological/technical forces
preventing firms to enter market

14. There is complete information.
All the buyers and sellers have complete
knowledge of all market conditions
if one firm increases its price above the market
price, all the buyers will immediately know
about it and buy from those firms that still ask a
lower price.

15. Firms are profit maximizers
The goal of all firms in a perfectly competitive
market is profit and only profit.
When it decides what quantity to produce it
continually asks how changes in quantity affect
profit

16. Demand Curve Under
Competitive Market
The demand curves facing the firm is different
from the industry demand curve.
The market demand curve is downward sloping
while the individual firm is horizontal
This means the market price is determined by
the market forces and each firm takes that
prices.

17. Price
Price=AR=MR
Firm ( is a Price Taker)
Price
Industry
Demand Curve
Supply Curve
Output Output
The market determines the price,
After the price is determined, firms can not affect the market price, so they
can sell any quantity on that price and become a price takers
Market and Individual Firm

18. Profit Maximizing and Level of
Output
Since profit is the difference between total
revenue and total cost, what happens to profit
in response to a change in output is determined
by marginal revenue (MR) and marginal cost
(MC).
A firm maximizes profit when MC = MR.

19. Revenue
Total revenue for a firm is the selling price times
the quantity sold.
TR = (P × Qs)
Total revenue is proportional to the amount of
output.
Average revenue is total revenue divided by the
quantity sold.
AR = TR /Qs

20. Marginal revenue (MR) – the change in total
revenue associated with a change in quantity.
MR =∆TR/ ∆ Q
Since a perfect competitor accepts the market
price as given, for a competitive firm, marginal
revenue and average revenue equals price
(MR=AR = P)

21. Numerical
Q P TR (Q*P) AR (TR/Q) MR (∆TR/∆Q)
10 10 100 10
11 10 110 10 10
13 10 130 10 10
14 10 140 10 10
16 10 160 10 10
19 10 190 10 10

22. Firm’s goal is to maximize profits. Profit is the
difference of revenue and cost of production
if the marginal revenue of a product is greater
than the marginal cost, then the firm can
increase profit by changing output.
The supplier will continue to produce as long
as marginal cost is less than marginal revenue

23. Firm with Profit

24. If the marginal revenue is less than the marginal
cost, then the profit will be minus ( there is no profit
at all).
Then the firm is experiencing a loss and should cut
the production at this point.
The supplier will not produce any more since the
marginal cost is greater than the marginal revenue

25. Firm with Losses

26. To maximize profits, a firm should produce
where marginal cost equals marginal revenue.
Thus, the profit-maximizing condition of a
competitive firm is MC = MR = P.

27. Firm with Profit

28. Profit maximizing conditions
When MR > MC, increase Q
When MR < MC, decrease Q
When MR = MC, Profit is maximized