Perfect competition

Perfect competition

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  THE DYNAMICS OFPERFECT MARKET TOPIC: PERFECT MARKET PRESENTED BY: MSOMI NH NGEMA LO
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  INTRODUCTION (WHAT IS AMARKET STRUCTURE ) Market structure refers to how a market is organized. Is a concept which tells us how market for products are different from each other, especially differences in the degree of competition.
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  WHAT IS APERFECT MARKET It is a market structure where there are many buyers and sellers. The price is determined by market forces. This market is most efficient in the allocation of resources.
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  CHARACTERISTICS OF APERFECT MARKET TOOL BOX  NUMBER OF BUSINESS  NATURE OF A PRODUCT  MARKET ENTRY  CONTROL OVER PRICE  INFORMATION  DEMAND CURVE  EXAMPLES
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  NATURE OF THEPRODUCT Products must be identical. There should be no differences in design and quality. In this way products compete sorely on the basis of price and can be purchased anywhere.
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  NUMBER OF BUYERSAND SELLERS It should not be possible for a buyer or seller to influence the price. When there are many sellers, the share of each seller in the market is so small that the seller can not influence the price. Sellers are price takers, they accept the prevailing market price. If they increase prices above the market price, they will lose customers.
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  MARKET ENTRY Producers mayenter and leave a market with little interference . Entering and leaving a perfect market is easy as less capital is required and there are fewer legal restrictions.
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  MARKET INFORMATION All buyersand sellers must be fully aware of what is happening in any part of the market. Technology has increased competition as information is easily obtained via the market.
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  DEMAND CURVE The demandcurve is horizontal, where demand = average revenue = marginal revenue.
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  ADDITIONAL CHARACTERISTICS Profit andloss. Factors of production are completely mobile. Efficient transport and communication. No preferential treatment or discrimination. No collusion.
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  Perfectly Competitive Firmsare “Price Takers” An individual firm in a perfectly competitive market has no control over the price of its own output. This is because the price is determined based on market supply and market demand. Note from the graph below that:  The demand seen by the firm is determined by the price in the market.  Price also determines the firm’s marginal revenue  The firm has no “price-making power” because if it raises its price, it will sell no output, and  if it lowers its price, it will not be able to cover its costs of production.  Demand for the individual firm’s output is perfectly elastic  To maximize its profits, a firm should produce where its marginal revenue equals its marginal costs.
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  Profit Maximization inthe Short-run: The Profit-earning Firm If, when producing at its MC=MR point, a firm in a perfectly competitive market is selling its output for a price that is greater than its average total cost, then the firm is earning economic profits. Economic profits mean the firm is covering all of its explicit and implicit costs, and is earning additional revenue beyond these as well. Study the graph, and note:  The market demand is relatively high, presenting firms with a price that is greater than their ATC  The firm’s economic profits is the blue area.  The firm is maximizing its profits by producing where MR=MC.  Due to the absence of entry barriers, these profits will not be sustained in the long-run, as new firms will enter the market.
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  Profit Maximization inthe Short-run: The Loss-minimizing Firm If, when producing at its MC=MR point, a firm in a perfectly competitive market is selling at a price that is lower than its average total cost, the firm will be minimizing its losses, but earning no economic profit at all. The loss minimizing firm will either exit the industry in the long-run, or hope other firms exit until the supply decreases, causing the price to rise once again. Study the graph, and note:  The market demand is relatively low, so the price the firm can sell its output for is below its average total cost  The firm’s economic losses are the cream area.  The firm is minimizing its losses by producing where MR=MC.  Due to the absence of entry barriers, these losses will be eliminated in the long-run as firms exit the industry to avoid further losses.
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  Profit Maximization inthe Short-run: The Breaking-even Firm If, when producing at its MC=MR level of output, the price the firm can sell its output for is exactly equal to the firm’s minimum average total cost, then the best the firm can hope to do is to break even. Breaking even means a firm is covering all of its explicit and implicit costs, but earning no additional profit. The firm is earning only a NORMAL PROFIT. Study the graph, and note:  The market demand and supply have set a price equal to the firm’s minimum average total cost.  The firm is just covering all its costs, meaning it is earning zero economic profits, but no losses  If the firm produced at any quantity other than Qf, it would earn economic losses. By producing at Qf, it is breaking even.  There is no incentive for firms to enter or exit this market.
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  CONCLUSION  The characteristicsof a perfect market above indicate that the market has to meet strict requirements before it can be described as perfectly competitive and also that it is important for a perfectly competitive firm to produce at a profit maximisation point.