Market Structure Perfect Competition Why study perfect competition

Market Structure: Perfect Competition • Why study perfect competition? – Standard for comparison – More prevalent than you might think

Analyzing Market Structure • What is the profit-maximizing output level? • What is the profit-maximizing price? • What role does cost play in determining output and price?

Characteristics of a Market • • Number of buyers and sellers Nature of the product Degree of information available Barriers to entry and exit

Perfect Competition: Price Takers • Agriculture – Farming – Cattle ranching • Long-haul trucking • Local retail apparel • Contract construction

What’s So Perfect about Perfect Competition? • Short-run resource allocation – Mutually beneficial transactions – Consumer surplus • Long-run efficiency – Produce at minimum LAC

Short-Run Equilibrium in Perfect Competition • Graphical representation – Profit maximization – Short-run supply curve • Mathematical model – TR - TC approach – MR = MC approach – Marginal profit = 0 approach

Long-Run Equilibrium in Perfect Competition • LRAC and LRMC • Equilibrium at minimum LRAC • Long-run industry supply curves – Constant-cost industry – Increasing-cost industry – Decreasing-cost industry

Theory of Contestable Markets • Generally speaking, actual number of firms important • Potential entry may be more important • Actual number of firms may not matter

Characteristics of Monopolistic Competition • Many independently acting firms. No collusion • Products are close, but not perfect, substitutes • No barriers to entry or exit • Imperfect information, bringing out the possibility of advertising

Short-Run Equilibrium • • MR = MC P > MC > ATC Profit > 0 Graphical example

Long-Run Equilibrium • Profit attracts rival firms • Demand falls or prices rise to meet challenge • P = ATC, but still > MC • Excess capacity • Graphical example

Monopolistic Competition and Perfect Competition: A Comparison • LR equilibriums • Monopolistic competition – Inefficient, excess capacity – Too many firms, too many brands – Too much selling expense – Spurious product differentiation