Pure Competition in the Short Run - Coggle Diagram
Pure Competition in the Short Run
Four Market Models
: economists group industries into four market structures.
: involves a very large number of firms producing a standardized product, New firms can enter or exit the industry very easily. Firms must accept the market price.
: is a market structure in which one firm is the sole seller of a product or service. The entry of new firms is blocked therefore one firm constitutes the entire industry. The monopoly firm produces a single unique product and has full control over that product's price.
: it characterized by a relatively large number of sellers producing differentiated products. Both entry and exit from monopolistically competitive industries is quite easy. This market structure possess some but not much control over selling prices.
: involves only a few sellers of a standardized or differentiated product, so each firm is affected by its rival's decisions and must take those decisions into account in determining its own price and output.
: Characteristics and Occurrence- the pure competition is relatively rare in the real world, this market model is highly relevant in several industries.
Very large numbers
: a basic feature of pure competition is the presence of a large number of independently acting sellers often offering their products in large national or international markets.
purely competitive firms produce standardized( identical or homogenous) products. They make no attempt to differentiate their products and do not engage in other forms of nonprice competition
in a purely competitive market individual firms do not exert control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or therefore product price.
*Free entry and exit
:* new firms can freely enter and existing firms can freely leave. No significant legal, technological, financial or other obstacle prohibits new firms from selling their output in a competitive market.
Demand as Seen by Purely Competitive Seller
: how a purely competitive seller sees demand.
Perfectly elastic demand: the demand schedule faced by the individual firm in a purely competitive industry is perfectly elastic at the market price.
Average, Total and marginal revenue: the price is equal the marginal revenue
TR-TC approach to maximise profits in the short run
A firm maximizes its short run profit by producing the output at which total revenue exceeds total cost by the greatest amount
MR-MC approach to maximize profits in the short run
Provides price exceeds minimum average variable cost , a competitive firm maximizes profit in the short run by producing the output at which price or marginal revenue equal marginal cost.
If price is less than minimum average variable cost, a competitive firm minimizes its loss by shutting down. If price is greater than AVC but less than ATC, a competitive firm minimizes its loss by producing the P=MC amount of output. If price exceed ATC, the firm maximizes its economic profit at the P=MC amount of output.
Marginal cost and short run supply
Applying the MR(=P)=MC rule at various possible market prices leads to the conclusion that the segment of the firm's short run marginal cost curve that lies above the firm's average variable cost curve is its short run supply curve