Pure Competition (0)

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Pure Competition
Competition
The word “competition” may be used in two ways :

rivalry – (synonym; opposition, antagonism)
structural competition or “pure competition”

The main characteristics of competition:

Number of firms

Type of product

Control over price

Conditions of entry

Nonprice competition

Information flow
Pure Competition

Involves very large numbers of sellers and buyers.
Firms producing identical or homogeneous products .
Standardized product (a product identical to that of other producers ). (ex. corn or cucumbers).

Free Entry and Exit : no significant legal , technological , financial, or other obstacles prohibiting new firms from selling their output in any competitive market

No control over the price: "Price Takers" ( the firms have no market power ) .

The individual firm has very little to no impact on the market.

Demand is perfectly elastic.
Maximizes productive and allocative efficiency.
Perfect competition includes complete information. ex. Agriculture

Pure competition markets do not actually exist.

Note : Pure competition does not actually exist in our society, and the agriculture industry is the closest industry to being purely competitive.

The pure competition model is used as a standard to evaluate the efficiency of our economy (something to compare to and help our understanding of economy.)
Monopolistic Competition

Involves large number of firms, but not as many as in pure competition.
Produces differentiated products
In marketing , product differentiation (also known simply as “differentiation” is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market.

This involves differentiating it from competitors’ products as well as one's own product offerings
Product essentially the same as another: a product or service that differs from its rivals only in packaging or advertising
( clothing , furniture, books )
Limited control over prices ex. retail trade, dresses, shoes
Nonprice competition - a selling strategy in which firms try to distinguish their product or service on the basis of attributes such as design and workmanship (product differentiation)

Focuses mostly on advertising, brand names, and trademarks

Firms can easily enter or leave this market, although not as easily as firms in a purely competitive market.
Imperfect Competition

Oligopoly

Involves a few firms that exert considerable influence over the industry
Produces either standardized or differentiated products.
Nonprice competition: emphasis on product differentiation
Existing firms are strong rivals and affects each other's price and output.

Control over price limited by mutual interdependence; considerable with collusion (the decision of rivals).
A great deal of nonprice competition, especially with differentiated products

ex. steel , automobiles, household appliances

Harder for a firm to enter or exit.

Imperfect competition

Pure Monopoly

Only one firm is involved.
Products are unique with no substitutes .
Nonprice competition: mostly public relations
Entry of additional firms is not possible--one firm constitutes the entire industry.
Entry to the industry is often blocked by government. It requires patent or licenses.

There is total control over price "Price Makers "

ex. local electric utility
Oil,
diamonds

Since the monopolist produces a unique product, it makes no effort to differentiate its product.

Imperfect Competition

Characteristics and Occurrence

Very large numbers of firms
There is a large number of of independently acting sellers, each offering their products in large national or international markets
- ex. farm commodities, the stock market, the foreign exchange market

Standardized product

The product is standardized because it is either identical to each other, or homogeneous
As long as the price is the same, consumers will be indifferent about which seller to buy the product from
The producer would not lower the price, since it will not earn anything by shrinking its profit .
Buyers view the products of firms B, C, D, and E as perfect substitutes for the product of firm A
- Thus, each firm is a price taker since consumers will simply buy from another firm if one firm raises their prices.

"Price takers"

Individual firms exert no significant 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 product price
The individual competitive producer is at the mercy of the market;
asking a price higher than the market price would be futile

Free entry and exit

There are no legal, technological, financial, or other obstacles that prevent firms from entering or leaving a competitive market.
It is easy for firms to enter or exit the industry (especially if it has small economies of scale ).
This is only possible in a purely competitive market because firms in this type of market are "price takers," and the number of firms does not affect the price of a product.

Perfectly Elastic Demand:

Single Firm= small fraction of total output. Hence they are price-takers as they cannot influence market price
MANY firms TOGETHER can affect market price by changing industry output
- Graphically - perfectly elastic demand for single firm - horizontal line.
- ONLY ONE MARKET PRICE

Firm’s Output
The firm’s choice of method and level of the costs of output is dependent on costs and revenue associated with each output alternative.

Productions are reflected in the supply side of the model.

The revenue of the firm is reflected in the demand functions.
Average , Total and Marginal Revenue
Average Revenue (AR) schedule = demand schedule

Price per unit to buyer = revenue per unit to seller
average revenue=price

Total Revenue (TR)= Price x Quantity ( increases by constant amount – constant price)

TR = P x Q
- Straight upward sloping line – constant slope (= price)
- The area formed by the rectangle with coordinates (0,0), (0,P), (0,Q), (P,Q)

Marginal Revenue (MR) = Change in Total Revenue from selling ONE additional unit of output. Same as price.
- MR = ∆ TR from selling 1 more unit of output = price
The reason MR=D=AR=P is because in a purely competitive firm the price carries over from the industry and thus that equals the demand.
At this demand each additional output increases by the same degree and the average revenue at any point is the same price. Even with changes in the marketplace, the line may move vertically but the values will always be equal
Price line is the same as the average revenue or marginal revenue since the price is fixed
Profit Maximization in the Short-run: TR/TC Approach

Firm = price taker → firms can only adjust output to maximize profit
Short-run = fixed plant → firms can only adjust amount of variable resource such as labor and materials.

2 ways to determine maximum profit and minimum loss output level

Total-revenue-total- cost approach
Marginal-revenue-marginal-cost approach
Both apply to pure competition, pure monopoly, monopolistic competition, oligopoly

Short Run Profit Maximization

Profits (p) = TR - TC.

- p are often the objective or goal of firm.

The firm will choose to produce and offer for sale all additional units of output that they can produce for a cost (MC) that is less than the additional revenue (MR) that they collect .
Maximum profits (or minimum loses ) for a firm occur when MR = MC.

Ideally, the market will “ signal ” the costs of sellers and benefits to buyers with the market price; P = MR = MC
Total-revenue-total-cost approach
Should we produce this product?
Profit → Yes; Loss→ No
In what amount?

Output level where economic profit is maximized
TR– TC = (P x Q) - (FC + VC) = economic profits

Break-even point = when normal profit is satisfied
- Intersection of TC + TR (TR covers all TC)
- No economic profit – only normal
- There are 2 break-even points on graph – any point in between is economic profits
- Profit is maximized on a graph where the vertical distance between TR and TC is the greatest

Profit Maximization in Shotr-run: MR/MC Approach

As long as MRD ARP > AVC at the point where MC = MR, profit is maximized and production should continue
At any point where MR>MC, keep producing!!
You can still profit more
At any point where MR

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meeryke Õppematerjali autor

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