TAILIEUCHUNG - Lecture Basic microeconomics - Chapter 11: Perfect competition

After reading this chapter, you should be able to: List the six conditions for a perfectly competitive market, explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor, demonstrate why the marginal cost curve is the supply curve for a perfectly competitive firm,. | Perfect Competition Chapter 11 Laugher Curve Q. How many economists does it take to screw in a light bulb? A. Eight. One to screw it in and seven to hold everything else constant. Perfect Competition The concept of competition is used in two ways in economics. Competition as a process is a rivalry among firms. Competition as a market structure. Competition as a Process Competition involves one firm trying to take away market share from another firm. As a process, competition pervades the economy. A Perfectly Competitive Market A perfectly competitive market is one which has highly restrictive assumptions, but which provides us with a reference point we can use in comparing different markets. A Perfectly Competitive Market In a perfectly competitive market: The number of firms is large. The firms' products are identical. There is free entry and exit, that is, there are no barriers to entry. There is complete information. Firms are profit maximizers. Both buyers and sellers are price takers. The Necessary Conditions for Perfect Competition The number of firms is large. Large number of firms means that any one firm's output is very small when compared with the total market. What one firm does has no bearing on market quantity or market price. The Necessary Conditions for Perfect Competition Firms' products are identical. This requirement means that each firm's output is indistinguishable from any other firm’s output. Firms sell homogeneous product. The Necessary Conditions for Perfect Competition There is free entry and free exit. Firms are free to enter a market in response to market signals such as price and profit. Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market. The Necessary Conditions for Perfect Competition There is free entry and free exit. Technology may prevent some firms from entering the market. There must also be free exit, without incurring a loss. The Necessary Conditions for Perfect .

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