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Market Structure: Perfect Competition • Why study perfect competition? – Standard for comparison – More prevalent than you might think Analyzing Market Structure • What is the profit-maximizing output level? • What is the profit-maximizing price? • What role does cost play in determining output and price? Characteristics of a Market • • • • Number of buyers and sellers Nature of the product Degree of information available Barriers to entry and exit Perfect Competition: Price Takers • Agriculture – Farming – Cattle ranching • Long-haul trucking • Local retail apparel • Contract construction What’s So Perfect about Perfect Competition? • Short-run resource allocation – Mutually beneficial transactions – Consumer surplus • Long-run efficiency – Produce at minimum LAC Short-Run Equilibrium in Perfect Competition • Graphical representation – Profit maximization – Short-run supply curve • Mathematical model – TR - TC approach – MR = MC approach – Marginal profit = 0 approach Long-Run Equilibrium in Perfect Competition • LRAC and LRMC • Equilibrium at minimum LRAC • Long-run industry supply curves – Constant-cost industry – Increasing-cost industry – Decreasing-cost industry Theory of Contestable Markets • Generally speaking, actual number of firms important • Potential entry may be more important • Actual number of firms may not matter Characteristics of Monopolistic Competition • Many independently acting firms. No collusion • Products are close, but not perfect, substitutes • No barriers to entry or exit • Imperfect information, bringing out the possibility of advertising Short-Run Equilibrium • • • • MR = MC P > MC > ATC Profit > 0 Graphical example Long-Run Equilibrium • Profit attracts rival firms • Demand falls or prices rise to meet challenge • P = ATC, but still > MC • Excess capacity • Graphical example Monopolistic Competition and Perfect Competition: A Comparison • LR equilibriums • Monopolistic competition – – – – Inefficient, excess capacity Too many firms, too many brands Too much selling expense Spurious product differentiation
