PURE

AND PERFECT COMPETITION

A market is said to be purely competitive if

1. There is a large number of sellers and buyers of the

commodity each too small to affect the prices of the commodity; 2. The outputs of all Girms in the market are homogeneous i.e., the product of any seller is considered as exactly alike in all respects to the product of any other seller; and 3. There is perfect mobility of resources, i.e., there is freedom of entry into and exit from the industry

A market is said to be perfectly competitive

0 If it contains all the characteristics of pure

competition plus additional characteristics: consumers, resources owners, and Girms in the market have perfect knowledge of present and future prices and costs
0 Perfect knowledge a person knows the prices of a

commodity being charged in the markets of Cubao or Divisoria; based on this knowledge he can make his decision as whether to buy from one market or the other based on price differences

DEMAND CURVE

Firm Demand Curve

0 When there are large numbers of sellers and buyers of

a commodity, each would be too small a unit to affect the price of the commodity. Consider a typical rice farmer, for example. Since is only one of millions of farmers in the Philippines, his individual decision regarding the price of his product would not signiGicantly affect the price of the rice in the market.

Firm Demand Curve

0 This means that both the producers and the sellers

are price takers, i.e., they take whatever price is dictated by the market. Given this condition, the demand curve under a purely competitive market is given.

Firm Demand Curve

Price FIRM

Demand

Output

Elastic Demand Curve

0 The Girm can sell any amount it can produce at that

price. 0 Industry demand curve is downward sloping 0 Supply curve is positively sloped
0 Subject to various inGluences

0 The market price is determined by the interaction of

demand on one side, and supply on the other

Equilibrium Price
Price INDUSTRY S

D Q Output

Short Run
0 A time period in which a Girm can vary its output but

does not have time to change the plant size 0 During this period, the Girm, for example can alter the amount of some factors such as raw materials or labor but does not have time to change the number of machines or the sizes of the plant which is considered Gixed

Short Run
0 During the short-time period, the number of Girms in

an industry is Gixed

0 New Girms do not have time to enter and existing Girms

don not have time to leave

0 Any change in production must come from the Gixed

plant capacity of existing Girms 0 One assumption of pure competition is that each Girm is too small relative to the price of the product 0 The problem facing the Girm is that of determining what output to produce and sell

ProGits
0 Economic pro6its are a pure surplus or an excess of

total receipts over all costs of production incurred by the Girm 0 Included as cost are obligations incurred for all resources used which includes the opportunity costs 0 These costs include returns to the owners of capital used equivalent to what they could get had they invested in capital elsewhere in the economy
0 Include implicit returns to labor owned by the operator

of the business

Corporate ProGits
Gross Income
- Expense (includes interest payments on bonds,

amortization expenses, depreciation expenses, and others = Net income or proGits

Obligations incurred to the owners of the corporations capital (its stockholders) are as much cost of production as are those incurred for labor or for raw materials). This means that a company has to make payments to capital owners in the form of dividends from the corporations proGits.

Corporate ProGits
Gross Income
- Expense

= Net income or proGit - Average dividends = Economic proGits

To arrive at economic pro6its, dividend payments equal to what investors could earn had they invested elsewhere in the economy should be subtracted from the corporations net income

0 Given the market price of a product, the producer in a

competitive market is faced with the following questions:

0 Should I produce? 0 If so, what will I produce and how much? 0 Will proGit be realized (or loss)? 0 If so, how much proGit (or loss)?

Short-run Equilibrium of the Firm: Total Revenue Total Cost Approach

0 One of the approaches at answering these questions

and arriving at the break-even point and maximum proGit 0 Break-even point is arrived at when total revenue just equals total cost. Even before thinking of maximum proGit, or even any positive proGit, the producer has to break-even Girst. Once this is achieved, any point after the break-even point so long as revenue are greater than costs, will give the producer positive proGit

Short-run Equilibrium of the Firm: Total Revenue Total Cost Approach

0 Total proGits = Total revenue Total Costs 0 So long as revenues are greater than costs, the Girm receives proGits 0 If costs are greater than revenues, the Girm is operating at a loss 0 Total proGits are maximized when the positive difference between total revenue and total costs is at its greatest 0 The equilibrium output of the Girm is the output at which total proGits and maximizes

Short-run Equilibrium of the Firm: Total Revenue Total Cost Approach

0 Total Revenue (TR) is derived by multiplying Price by

Quantity (TR = P x Q) 0 Assuming a market price of P131, the Total Revenue curve is obtained by multiplying the values under Quantity by Price 0 Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) 0 ProGit = Total Revenue Total Cost 0 BEP (Break-even Point): TR = TC