Pure Competition Market Model

Four Market Models

• Market structures include pure competition, pure monopoly, monopolistic competition, and oligopoly

Pure Competition

• Involves a large number of sellers offering a standardized product
• Firms are "price takers" and can enter or exit the market freely

Demand in Purely Competitive Market

• Demand is perfectly elastic
• Individual firms can sell as much as they want at the market price
• Demand curve is a horizontal line

Average, Total, and Marginal Revenue Formulas

• Average revenue equals revenue per unit, calculated as AR = TR/Q = P
• Total revenue is calculated as TR = P x Q
• Marginal revenue is extra revenue from one more unit, calculate it as MR = ΔTR/ΔQ

Profit Maximization: TR – TC Approach

• Producers in a competitive market aim to produce where total revenue exceeds total cost by the largest margin
• Break-even point is where total revenue equals total cost

Profit Maximization: MR = MC Approach

• Firms should determine to produce using the MR = MC rule
• Involves determining if the firm should produce, in what quantity, and what the resulting economic profit or loss will be

Short-Run Supply

• Short-run supply curve is the quantity a firm will supply at each price in the short run
• As long as the price (P) exceeds the minimum average variable cost (AVC), a firm will continue to produce, following the rule MR (= P) = MC

MC Curve and Short Run Supply

• Marginal cost (MC) becomes the short-run supply curve because it shows the quantity a firm is willing to supply at each price

Output Determination in Pure Competition in the Short Run

• Firms should produce if price is equal to or greater than minimum average variable cost
• Produce the quantity where MR (=P) = MC.
• Production results in economic profit if price exceeds average total cost, otherwise, there is a loss

Firm and Industry: Equilibrium Price

• Equilibrium occurs where quantity supplied equals quantity demanded

Short-run Competitive Equilibrium

• The market price and quantity are determined by the intersection of the market supply and market demand curves
• Individual firms then take this market price as given and produce the quantity where P = MC

Firm versus Industry

• Fallacy of composition assumes that what is true for an individual is also true for the group

The Long Run in Pure Competition

• In the long run, firms can enter or exit the industry, and expand or contract capacity
• Decisions are based on profits or losses

Assumptions for long-run equilibrium Model

• Easy entry and exit, identical costs for all firms, and a constant-cost industry

Long-Run Equilibrium conditions

• Entry eliminates profits and exit eliminates losses
• Entry increases supply and lowers prices, while exit decreases supply and raises prices

Long-Run Adjustment Process

• Firms seek profits and avoid losses
• Firms are free to enter or exit
• Production happens at a firm's minimum average total cost
• Price will equal minimum average total cost

Long-Run Supply Curves

• In a constant-cost industry, entry or exit doesn't affect long-run average total cost, and resource prices remain constant
• In an increasing-cost industry, long-run average total cost increases with expansion because of specialized resources
• Decreasing-cost industries benefit from declining average total costs with industry growth

Pure Competition and Efficiency

• In the long run, pure competition achieves productive and allocative efficiency
  • Productive efficiency: occurs when P = minimum ATC
  • Allocative efficiency: happens when P = MC

Dynamic Adjustments

• Purely competitive markets adjust automatically to changes in consumer tastes, resource supplies, and technology
• The market operates via the "invisible hand"

Technological Advance and Competition

• Entrepreneurs innovate to boost profits
• Innovation occurs through decreasing costs or creating new products

Creative Destruction

• Competition and innovation can lead to the creative destruction of old products and methods
• New products and methods may destroy the old products and methods

Impact of the COVID Pandemic

• The COVID pandemic caused a decline in revenue for many businesses, including restaurants, hotels, and rental car companies