1. Assumptions of perfect competition
1. Homogenous product

All firms in the sector develop the same homogeneous good.

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Consumers cannot identify Canadian wwarmth from Kansas wwarm.

Milk is frequently homogenized.

Market for wwarm is frequently cited as an example of a competitive industry.

2. Many sellers and also buyers

Mullik Ghat Flower Market in Kolkata, India (2016). The sector is more than 125 years old, and also tright here are nearly 2000 sellers eextremely day.

A large variety of independent firms offer the product.

Each buyer is likewise tiny family member to the sector.

For instance, a wheat farmer selling 5,000 bushels of wwarm every year have actually no noticeable influence on the US wwarm market in which even more than 2 trillion bushels are traded every year.

3. No obstacles to entry

example: the Video rental market.

Practically, tbelow are no enattempt barriers. The capital need to start a organization is small. No distinct expertise or ability is crucial.

(i) understanding, (ii) capital, and (iii) skill.

4. perfect information

All sellers and also buyers have perfect information, about prices, innovation, and also availability of assets.

This presumption is the least plausible in the actual people.

Types of Market
Monopoly Oligopoly Monopolistic Competition Perfect Competition
One firm a few firms Many kind of buyers + sellers Many buyers + sellers
no cshed substitutes

homogeneous commodities, or

identified products

Differentiated products Homogenous products
Entry barriers some entry barriers No enattempt barriers No entry barriers
Potential lengthy run profits Potential long run profits Zero profit in the long run Zero profit in the long run
Market power and price setting common market power and manage over price Little sector power + little bit regulate over price

No industry power.

price taking actions.

2. Demand in a Competitive Market
Private usage good Market Demand also for a exclusive usage excellent is sindicate a horizontal amount of individual demand curves.


For circumstances, in this figure, at a offered price, the amount demanded by Adam is 3.

Likewise, the amount demanded by Bob is 4.

Market demand or aggregate demand also is 3 +4 = 7. Repeat this procedure for all prices to obtain the industry demand curve.

3. Demand facing a Competitive Firm
Market demand cuve is negatively sloped.
why horizontal?

Demand also curve dealing with a firm"s is horizontal = p.

bereason a single firm cannot change the price.

For all helpful purposes, the market price is the firm"s demand also curve.


q = output of a firm

Q = industry output

1. Which of the complying with are many most likely to be perfectly competitive? a. Chicback Board of Trade b. fast-food sector c. computer system software application market d. New York Stock Exadjust e. clothes industry
Answer: A perfectly competitive sector is approximated most very closely by a extremely organized market. Of the markets shown, the Chicback Mercantile Exchange and the New York Stock Exreadjust many very closely resemble perfectly competitive markets.

4. Marginal Revenue of a Competitive Firm

Marginal Revenue

Total Revenue = pq

Suppose output rises by 1 unit: q → q+1.

Δq = 1.

Then revenue increases: pq → p(q+1)

ΔTR = p(q+1) - pq = p

Marginal revenue (MR) = ΔTR/Δq = p.

In a competitive industry, MR = price.

short run profit

Young farmers researching young wheat

The firm"s SR profit is offered by

π = pq - C(q) = pq - (FC + VC),

wright here p is market price, q is output and C(q) is manufacturing expense.

Revenue and also Cost
Two breakeven points

A breakalso point is the level of output where profit is zero. That is, revenue amounts to manufacturing cost.

A firm typically has 2 breakalso allude. Between these 2 breakalso points, the firm have the right to earn a positive profit.

If price is equal to the minimum of AC, tright here is just one breakeven allude.

If price is below the minimum of AC, tright here is no breakeven allude.

6. How much to Produce

Profit = vertical distance between revenue and also total price.

Between the two breakalso points, profit is positive. The firm need to remain in this area.

As output increases beyond the first breakalso allude, the small arrows diverge and also profit boosts as output boosts. The firm need to boost output.

At the sslrfc.orgd breakeven allude, the 2 little arrows converge, and profit shrinks as output rises. The firm must decrease output.

The vertical distance in between pq and price curve is maximized as soon as the two little arrows are parallel to each other. ⇒ Two curves need to have the same slopes:

P = MC

statement of problem

A competitive firm’s problem in the SR is to choose q to maximize its profit

π = pq - c(Q),

i.e., to choose output q to maximize the vertical distance between revenue and also expense curve.

Necessary problem

Consider a readjust in profit resulted in by a little change in output. Since price is resolved,

Δπ = p(Δq) - Δc.

Dividing both sides by Δq, we obtain the FOC,

Δπ/Δq = p - MC = 0.

p is the slope of the revenue feature, while MC is the slope of the SR expense feature. For the profit to reach a maximum, the two curves must have the exact same slope, i.e.,

P = MC.

2nd condition

(Note that tbelow are two feasible options to P = MC.

Due to the fact that MC curve is U-shaped, the price line frequently intersects MC curve twice.

We need to exclude the solution that maximizes loss.) :

MC have to be raising (the output should be greater than the inflection point), or

MC cuts the price line from listed below.

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If MC curve is U-shaped, an optimal output occurs on the climbing portion of the MC.