Summary of Pure Competition
There are four major types of markets. They are: Pure Competition: Large number of buyers and sellers trading a standardized product (corn, wheat); Pure Monopoly: One seller, firm is the industry; Monopolistic Competition: Large number of buyers, large number of sellers each selling a similar but slightly differentiated product (cigarettes); Oligopoly: Very few sellers that acknowledge that decision of one firm affects the others and takes this fact into account when making production or pricing decisions.In pure competition there are a large number of buyers and sellers issuing a standardized product. There are "price takers." Meaning no one firm can affect the market price. Individual competitor is at the mercy of the market also. Besides "price takers," there is free entry and exit into the market. The relevance of studying pure competition is that some industries do behave like perfectly competitive firms. Wheat and rice are examples. Studying pure competition also allows us to apply revenue and cost ideas in the simplest possible context. It also provides a standard against which other more realistic markets can be compared. Demand curves tell us by how much will quantity demanded change if price changes it is a "
If market prices lie above the ATC curve of the firm then the firm is making positive profits and therefore the firm should produce at the point where MR = MC. If the market price lies below ATC and above AVC, then the firm incurs losses. But at least fixed costs get covered when production happens and therefore the firm should produce - production reduces losses. If the market price lies below AVC then not only does the firm incur losses but also increase in production actually increases losses. So production should cease. Notice that at price $131 the firm supplies 9 units (and we get this number by reflecting off the MC curve). Notice that at price $81 the firm supplies 6 units (again we get this number by reflecting off the MC curve). Notice that at price $71 (below AVC) the firm supplies 0 units. It makes more sense to shut down the plant rather than produce when market price lies below the AVC. Therefore the portion of the firms MC curve above the AVC curve is also the firms supply curve. Supply curve of the firm shifts whenever marginal costs change for all units produced (e.g. changes in input prices, productivity, tech changes etc.). The industries supply curve is the horizontal sum of the individual firms supply curves. The industry supply curve and market demand curve (not the demand curve that the individual firm faces!!) together determine the market price. Profit maximization is when output is low it causes MC to be low (law of diminishing marginal productivity). Each additional unit produced adds more to revenue than to cost. Production should occur. When output is high MC is high (law of diminishing marginal productivity). Each additional unit produced adds more to revenue than to cost. Production should cease. Optimum production is when MR = MC. This is when profits are maximized. This rule holds for all market structures. But in the special case of perfect competition, MR = MC = Price. To calculate economic profit, go from the point where P = MR = MC and drop down vertically until you reach the ATC curve. Then draw a rectangle to the y-axis. The area of this rectangle is economic profit. Perfectly competitive firms w
Some common words found in the essay are:
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Approximate Word count = 1468
Approximate Pages = 6 (250 words per page double spaced)
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