Understanding Pure Competition

• The chapter covers pure competition

Four Market Models Characteristics

• Market structures exist in form of pure competition, pure monopoly, monopolistic competition, and oligopoly

Pure Competition

• Pure Competition features a very large number of firms
• Pure competition sells standardized products
• Pure competition has no control over prices
• Pure competition has very easy conditions of entry with no obstacles
• Pure competition has no nonprice competition
• Examples of Pure competition include financial markets, agricultural products and raw materials

Monopolistic Competition

• Monopolistic Competition includes many firms
• Monopolistic competition has differentiated products
• Monopolistic competition shows some control over price, but within rather narrow limits
• Monopolistic competition has relatively easy conditions of entry
• Monopolistic competition has considerable emphasis on advertising, brand names, and trademarks
• Examples of monopolistic competition include restaurants, gyms, gas stations, retail trade, dresses, and shoes

Oligopoly

• Oligopoly includes few firms
• Oligopoly sells Standardized or differentiated products
• Oligopoly experiences limited control over price by mutual inter-dependence and considerable with collusion
• Oligopoly experiences significant obstacles for conditions of entry
• Oligopoly typically has great deal of nonprice competition, particularly with product differentiation
• Examples of oligopoly include airlines, automobiles, wireless service providers, and space travel

Pure Monopoly

• Pure Monopoly is made up of one firm
• Pure Monopoly offers unique products with no close substitutes
• Pure Monopoly companies have considerable control over price
• Pure Monopoly experiences blocked conditions of entry
• Pure Monopoly features mostly public relations advertising
• Examples of Pure Monopoly are local utilities and patented pharmaceuticals

Pure Competition Characteristics

• Pure competition includes very large numbers of sellers
• Pure competition produces standardized products
• Included in pure competition are "Price takers"
• Pure competition is marked by being able to freely enter and exit

Purely Competitive Demand

• Purely competitive demand is perfectly elastic
• Firms produce as much or little as they wish at the market price
• Demand graphs as a horizontal line

Average, Total, and Marginal Revenue Formulas

• Average revenue equals revenue per unit
• AR = TR/Q = P
• Total revenue = TR = P multiplied by Q
• Marginal revenue equals extra revenue from 1 more unit.
• MR = ΔTR/ΔQ

Profit Maximization: TR – TC Approach

• The competitive producer aims to produce at the output level where total revenue exceeds total cost by the greatest amount
• Break-even point occurs where total revenue equal total costs

Profit Maximization: MR = MC Approach

• Firms use the MR = MC rule
• For a price taker, price = marginal revenue
• Firms must considers three questions:
  • Should the firm produce?
  • If so, what amount?
  • What economic profit (loss) will be realized?

Short-Run Supply

• Short-run supply curve occurs when price exceeds minimum AVC
• The firm continues to produce using the rule: MR (= P) = MC
• Supply graphs as an upsloping line

Output Determination in Pure Competition in the Short Run

• Firms should produce if price is equal to, or greater than, minimum average variable cost
  • This means that the firm is profitable or that losses are less than fixed cost
• Firms should produce where MR (= P) = MC
  • There profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized
• Firms should determine if production will result in economic profit
  • If price exceeds average total cost (TR exceeds TC) economic profit will result
  • However, if average total cost exceeds price (so that TC exceeds TR) no economic profit will result

Long Run in Pure Competition

• In the long run firms can enter or exit the industry and expand or contract capacity
• Decisions in the long run relate to profits or losses

Assumptions in Pure Competition over the Long Run

• Easy entry and exit of firms
• All firms in the industry have Identical costs
• Constant-cost industry, entry and exit of firms does not effect resources prices

Long-Run Equilibrium

• Entry eliminates profits
  • Meaning firms enter, supply increases, and price falls
• Exit eliminates losses
  • Meaning firms leave, supply decreases, and price rises

Long-Run Adjustment Process

• Adjustment process in pure competition involves:
  • Firms seeking profits and shun losses
  • Firms are free to enter or to exit
  • Production will occur at the firm’s minimum average total cost
  • Price will equal minimum average total cost

Long-Run Supply Curves

• Long-run supply is based on whether the market is a constant-cost, or increasing-cost industry
• Constant-cost industry- entry or exit does not effect long run ATC, and they have constant resource prices
• Increasing-cost industry-Most industries, LR ATC increases with expansion with specialized resources

Pure Competition and Efficiency

• In the long run, efficiency is achieved
  • Productive efficiency: Producing where P = minimum ATC
  • Allocative efficiency: Producing where P = MC
• With triple equality: P = MC = minimum ATC occurs
• Consumer and producer surplus are maximized

Dynamic Adjustments

• Purely competitive markets will automatically adjust to:
  • Changes in consumer tastes
  • Resource supplies
  • Technology

Technological Advance and Competition

• Entrepreneurs increase profits beyond just a normal profit by decreasing costs by innovating and making new product developments

Creative Destruction

• Competition and innovation can lead to creative destruction
• The creation of new products and methods can destroy the old products and methods

Last Word: The Pandemic Pause

• COVID pandemic led to a massive decline in revenue for many businesses, including restaurants, hotels, and rental cars