Transcript Perfect Competition 1

Perfect Competition
Perfect
Competition
Monopoly
Market
Structures
Imperfect
Competition
Oligopoly
Price Discrimination
Objective of firms ??
a) Maximise Profits
b) Minimise Profits
c) Maximise Losses
Firms maximise profits when ??
a) MC > MR
b) MC < MR
c) MC = MR
provide MC > MR at all
quantities after that
Firms in
Perfect Competition are??
a) “Price givers”
b) “Price takers”
Price taker means ??
a) The firm sets the price
b) The industry sets the price
Industry
S
Price
P1
Price
P1
Firm
AR
Q
Q1
Quantity
Quantity
Eg. of
Perfect Competition
Assumptions for Perfect
Competition (P 95/96)
1) Many small firms in the industry:
2) Many buyers in the industry:
3) Firms aim to maximise profits:
4) Freedom of entry into & exit from
the industry:
5) Widespread knowledge of profit
earned:
6) Products are homogeneous:
7) Perfect elasticity of the factors of
production:
8) Firms produce on the lowest point on
the Average Cost Curve.
Advantages of Perfect
Competition
• Low prices:
• No waste/efficiency:
• Guaranteed same quality from all
suppliers @ the same price:
Disadvantages
• No Choice:
• No economies of scale
• Do not benefit form lower unit costs
as production increases.
Explanation
• In the short run firms in perfect
competition earn super normal profits as
AR > AC.
• Because there is full knowledge of profits
other firms will enter the market.
• This causes the supply curve to shift to
the right.
• This causes the price to fall.
• This will cause the demand/AR to move
down.
Continued……
• This eliminates (gets rid of) SNP in
the long run.
• Perfect competition is as very
efficient because;
• Firm produce at the lowest point of
average cost curve– point A.
• Therefore firm do not waste any
scarce resources.