PURE

COMPETITION

PRESENTATION BY
GROUP 04
 Defining Pure
competition
Fundamental
• Characterstics
Large number of small firms, none of which has market power
• Standardized (identical) product across all sellers
• Price takers: individual firms cannot influence the market price
• Perfect information: buyers and sellers have full knowledge of prices and
products
• Free entry and exit in the long run ensures zero economic profit
Outcomes in Perfect Competition
Real World Examples • Allocative efficiency: resources are used
• Agriculture: markets for wheat, corn, where they’re most valued
rice • Productive efficiency: firms produce at the
• Foreign exchange markets: lowest possible cost
currencies traded globally • Normal profit in the long run: firms earn
just enough to stay in business
The Four Market
Models
Firms Demand
Curve
• The demand of an individual
firm in a purely competitive
market is perfectly elastic
• The firm represented cannot
influence the price
• In perfect competition,
individual firms face
perfectly elastic demand,
but the market demand
curve remains downward-
sloping
 Average, Total, and Marginal
Revenues

• Total Revenue: Is found by multiplying the price by corresponding quantity

the firm can sell (PxQ)
• Average Revenue: The total revenue divided by the number of units (TR/Q)
• Marginal Revenue: It is the change in total revenue (or the extra revenue)
that results from selling one more unit of output ( change in TR/ change in Q)
 Profit Maximization in the
Short Run: Total Revenue and
Total Cost Approach
TERMS
TR (Total Revenue) = Price × Quantity
TC (Total Cost) = Fixed Cost + Variable Cost
Profit = TR – TC
➡ Firm aims to maximize profit by finding the output where TR – TC is
the highest.
EXPLANATION OF TR-TC APPROACH
• In pure competition, firms can’t set their own price — they are price
takers.
• The only thing they can control is how much they produce.
• To maximize profit, they use the TR-TC approach.
 TR-TC Table & Key Profit
Questions

Key Questions Firm Asks

• Should we produce?
→ Yes, if total revenue can cover total variable
costs.
• How much should we produce?
→ The quantity where TR – TC is maximum.
• What will be the profit or loss?
→ Profit = TR – TC at that output level.
Graphical Explanation of TR-TC
Approach
Break-Even Points:
• These are where TR = TC (lines intersect).
• Firm earns no economic profit, only normal profit.
Profit Zone:
• Between two break-even points, TR > TC.
• Firm earns positive economic profit.
Maximum Profit Point:
• Vertical gap between TR and TC is largest here.
• Marked on the graph as “Maximum profit = 56”
• This is the profit-maximizing output level.
Loss Zones:
• Left side: TR < TC — cost is more than revenue
→ Loss
• Right side: TR < TC again → Loss increases if firm
over-produces.
The MR=MC Rule: Profit Maximization
In Pure Competition where firms are the price takers, the rule of MR=MC is
considered as a golden rule.
But what does it mean, Marginal revenue is the additional income from selling
one more unit, while marginal cost is the cost of producing that unit. Profit is
maximized when the last unit sold add exactly as much to the revenue as it
does to the cost. MR > MC , producing more increases the profit , If MR< MC
producing more reduces profit , the sweet spot is where they are equal.
 Why the MR=MC Rule Works
Profit Maximization Example Shutdown Condition

Suppose a cucumber farmer sells each If price falls below average variable cost,
unit at $10 (P=MR=10) if producing 5th continuing to produce increases losses.
cucumber cost $8 so the profit increase Shutting down limits losses to fixed costs,
by $2. The farmer will keep producing
protecting the firm from deeper deficits.
until the marginal cost of the next
cucumber reaches $[Link] the MC of the
cucumber exceed its price ,lets say it
reaches to $12 , it would reduce the profit
by 2,so the firm stop at the output where
MC=P
Explanation of the Graph: Profit Maximization in
Pure Competition (MR = MC [Link]
Rule) Cost (MC) Curve (Blue Line)
[Link]-sloping due to the law of
diminishing returns (each
additional unit costs more to
produce).

[Link] (P) = Marginal Revenue (MR)

(Green Horizontal Line)
[Link] firm is a price taker, so market
price is constant regardless of
output.

[Link] Total Cost (ATC) Curve (Red

Line)
1.U-shaped due to economies and
diseconomies of scale.
[Link] the profit-maximizing output , P
> ATC meaning the firm
earns economic profit.
[Link] Variable Cost (AVC) Curve
(Brown Line )

[Link] below ATC (since ATC = AVC +

Explanation of Loss Minimizing Case

[Link]-Minimizing Case (P = $81)

In the short run, the firm should
continue producing if P > AVC, even if
it is incurring a loss.
At P = $81, assume:ATC = $100AVC =
$70Since P ($81) > AVC ($70) →
produce to minimize [Link] per
unit = ATC - P = $100 - $81 = $19

Example : IndiGo Airlines (India)During

low travel demand (e.g., pandemic),
they continued flying limited routes to
cover variable costs like fuel, wages,
and airport fees, even when total costs
weren't recovered.

Graph Description:Include a cost curve

diagram with:MC, ATC, AVC curvesP =
$81 line above AVC but below ATCShow
loss area between ATC and Price at
Explanation of Shut Down Case

[Link] P < AVC, the firm should shut down

temporarily.

At P = $71, assume:AVC = $75 Since P

($71) < AVC ($75) → shut down as
losses exceed variable costs.

Example :
Still There Motel (USA)During off-
seasons or crises (e.g., COVID-19
lockdown), many motels shut down
operations as earnings couldn’t even
cover variable costs like cleaning,
utilities, and staff.

Graph Description: Include a cost curve

diagram with:MC, ATC, AVC curvesP =
$71 line below AVC Indicate shutdown
point and note zero production
 Firm’s Short-Run Supply
Curve
• In pure competition, the firm’s short-run supply
curve is the portion of its marginal cost (MC) curve
that lies above the average variable cost (AVC).
• If the market price is below AVC, the firm shuts
down in the short run to avoid greater losses.
• If the price is equal to or above AVC, the firm
continues producing to cover its variable costs and
possibly a portion of fixed costs.
• This supply curve reflects the minimum price at
which a firm is willing to produce each quantity of
output.
 Supply Curve and
Diminishing Returns
• As a firm increases output, it eventually faces diminishing returns, meaning
additional units become more costly to produce.
• Because of rising marginal costs, the firm requires higher prices to supply
larger quantities.
• The result is an upward-sloping supply curve in the short run, based on the
MC curve above AVC.
• Price and marginal cost move together—firms produce more only when
price is high enough to match increasing marginal cost.
Example:
In the U.S. corn industry, thousands of independent farmers supply a
homogeneous product. When corn prices rise, farmers increase supply—until rising
input costs (like fertilizer and diesel) raise marginal costs. Beyond a point, they
won’t expand output unless prices increase further, reflecting the MC = supply
 Short-Run Loss
Minimization:
Produce When P >
AVC
Concept: Firm produces if P > AVC,
covering variable costs and reducing
losses, despite P < ATC.
Example: American Airlines (2020) flew
at $81/seat, covering fuel, wages, and
part of aircraft leases.
Key Insight: P = $81 (> AVC) minimizes
losses vs. shutdown.
Graph: MC, ATC, AVC, and P = $81. Firm
produces at MC = P (Q ≈ 3), covering
AVC but not ATC
 FIRM VS INDUSTRY
EQUILIBRIUM

• Market • Industry supply • Individual firms

equilibrium and demand must adjust
occurs when curves intersect their output
quantity at the based on
demanded equilibrium market
equals quantity point, defining conditions,
supplied, market prices using key
ensuring the and resource decision rules
overall stability allocation to maximize
among
MARKET EQUILIBRIUM
ANALYSIS
Dutch Flower Market- A
Competitive Structure
The Dutch Flower Cluster operates as a near-perfectly competitive
market, especially through the FloraHolland auction system.
Market Entry and
•Structure
Over 3,700 small growers supplying •Exit
Low entry barriers for small growers
similar products like roses, tulips, and • Exit is easy — growers can leave the market
chrysanthemums. after a season
• Hundreds of buyers, including
exporters, wholesalers, and
supermarkets.
• Products are standardized —
Price
categorized by length, freshness, and
Behavior
•quality
Prices grade.
are set using a Dutch
auction
• All sellers receive the market-
clearing price
 Perfect Competition in Action-
Key Lessons
Firm Behavior in Perfect
•Competiton
Price Takers: Growers cannot influence prices — they simply accept what
the Dutch auction sets.
• No Strategic Pricing: Firms do not invest in pricing strategy or advertising.
• Cost Efficiency is Survival: Success is driven by minimizing unit costs and
speed to market.
Market Regulation and Broader Economic
•Structure
FloraHolland (Cooperative): Functions as a •Insights
Thin Margins & Normal Profits: In the long
neutral auction platform and ensures price run, economic profits approach zero — true
transparency, fairness, and quick turnover. to perfect competition theory.
• Sets grading standards to reduce product • High Sensitivity to Supply & Demand: A
uncertainty. bumper crop can crash prices; a shortage
• No Government Price Controls::The market is quickly raises them.
self-regulated through structure and • Barriers Are Low, But Competitive Pressure
incentives. Is High: Anyone can enter, but only the
 GROUP MEMBERS
Thank You
Hasan Umair
Suhaib haroon
Dua Imran
Abdul Haseeb
Shaheer Farooq
Mariam Siddiqui
Ali Shayan Dhanji
Rajnesh Kumar
Muhammad Bin Malik
Hafsa Amir
Efficiency in Pure
Competetion
Allocative Efficiency (P = MC)
• Achieved when firms produce the quantity where Price equals
Marginal Cost.
• Ensures resources go to goods most desired by society.
• No one can be made better off without making someone else
Real
worseWorld
off. Applications:
• Agricultural Products (e.g. Wheat, Rice, Sugarcane)
• Thousands of farmers sell identical products.
• Price is determined by market supply & demand.
• Firms are price takers, producing at P = MC = min ATC in the
long run.
Productive Efficiency (P= Minimum ATC):

• Occurs when firms produce at the lowest point of their Average

Total Cost curve.
• All resources are used efficiently, and costs are minimized.
• In the long run, purely competitive firms operate at this point
due to free market pressures.
Real World Applications:

Copper Mining (Chile)

Summary of Pure
Competition:
• Many firms sell identical products.
• Free entry and exit keeps the market balanced.
• Firms are price takers with perfectly elastic demand.
• Short run: Firms may earn profit, face loss, or shut down.
• Long run: Only normal profit is earned, ensuring maximum
efficiency
Role of Government:
• Keep markets open and competitive (no monopolies).
• Ensure transparency so consumers and businesses can make
informed decisions.
• Enforce contracts and reduce entry barriers.
• Support SMEs and digital access for fair competition.