1. Pure
Competitio
n
23C H A P T E R

2. Market Structure Continuum
FOUR MARKET MODELS
Pure Competition

3. Market Structure Continuum
Pure
Competition
FOUR MARKET MODELS
Imperfect Competition
All Markets that are
Not Purely Competitive

4. Market Structure Continuum
Pure
Competition
FOUR MARKET MODELS
Pure Monopoly

5. Market Structure Continuum
Pure
Competition
Pure
Monopoly
FOUR MARKET MODELS
Monopolistic Competition

6. Market Structure Continuum
Pure
Competition
Pure
Monopoly
Monopolistic
Competition
FOUR MARKET MODELS
Oligopoly

7. Market Structure Continuum
Pure
Competition
Pure
Monopoly
Monopolistic
Competition Oligopoly
FOUR MARKET MODELS
Pure Competition:
• Very Large Numbers
• Standardized Product
• “Price Takers”
• Free Entry and Exit

8. DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Perfectly Elastic Demand
Price Taker Role
For example...

9. $131 0 $ 0
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER

10. $131
131
0
1
$ 0
131
$131
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
]

11. $131
131
131
0
1
2
$ 0
131
262
$131
131
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
]
]

12. $131
131
131
131
0
1
2
3
$ 0
131
262
393
$131
131
131
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
]
]
]

13. $131
131
131
131
131
0
1
2
3
4
$ 0
131
262
393
524
$131
131
131
131
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
]
]
]
]

14. $131
131
131
131
131
131
131
131
131
131
131
0
1
2
3
4
5
6
7
8
9
10
$ 0
131
262
393
524
655
786
917
1048
1179
1310
$131
131
131
131
131
131
131
131
131
131
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
]
]
]
]
]
]
]
]
]
]

15. $131
131
131
131
131
131
131
131
131
131
131
0
1
2
3
4
5
6
7
8
9
10
$ 0
131
262
393
524
655
786
917
1048
1179
1310
$131
131
131
131
131
131
131
131
131
131
Product Price (P)
(Average Revenue)
Total
Revenue (TR)
Marginal
Revenue (MR)
Quantity
Demanded (Q)
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
]
]
]
]
]
]
]
]
]
]
Graphically
Presented…

16. DEMAND, MARGINAL REVENUE, AND TOTAL
REVENUE IN PURE COMPETITION
TR
D = MR
1 2 3 4 5 6 7 8 9 10
1179
1048
917
786
655
524
393
262
131
0
Priceandrevenue
Quantity Demanded (sold)

17. SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...
First:
Total-Revenue -Total Cost Approach
The Decision Rule:
Produce in the short-run if it can
realize
1- A profit (or)
2- A loss less than its fixed costs
The Decision Process:
•Should the firm produce?
•What quantity should be produced?
•What profit or loss will be realized?

18. SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...
First:
Total-Revenue -Total Cost Approach
The Decision Rule:
Produce in the short-run if it can
realize
1- A profit (or)
2- A loss less than its fixed costs
The Decision Process:
•Should the firm produce?
•What quantity should be produced?
•What profit or loss will be realized?
Applied
Graphically…

19. Total
Cost
0
1
2
3
4
5
6
7
8
9
10
Total
Product
Total
Fixed
Cost
Total
Variable
Cost
Total
Revenue Profit
$ 100
100
100
100
100
100
100
100
100
100
100
$ 0
90
170
240
300
370
450
540
650
780
930
$ 100
190
270
340
400
470
550
640
750
880
1030
Price: $131
- $100
- 59
- 8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0
131
262
393
524
655
786
917
1048
1179
1310

20. Total
Cost
0
1
2
3
4
5
6
7
8
9
10
Total
Product
Total
Fixed
Cost
Total
Variable
Cost
Total
Revenue Profit
$ 100
100
100
100
100
100
100
100
100
100
100
$ 0
90
170
240
300
370
450
540
650
780
930
$ 100
190
270
340
400
470
550
640
750
880
1030
Price: $131
- $100
- 59
- 8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0
131
262
393
524
655
786
917
1048
1179
1310

21. $1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
Totalrevenueandtotalcost
Total
Revenue
Total
Cost
Maximum
Economic
Profits
$299
Break-Even Point
(Normal Profit)
Break-Even Point
(Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
TOTAL REVENUE-TOTAL COST APPROACH

22. SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...
First:
Total-Revenue -Total Cost Approach
Three Characteristics of MR=MC Rule:
• The rule applies only if producing
is preferred to shutting down
• Rule applies to all markets
• Rule can be restated P=MC
Second:
Marginal-Revenue -Marginal Cost
Approach
MR = MC Rule

23. Average
Total
Cost
0
1
2
3
4
5
6
7
8
9
10
Total
Product
Average
Fixed
Cost
Average
Variable
Cost
Price =
Marginal
Revenue
Total
Economic
Profit/Loss
$100.00
50.00
33.33
25.00
20.00
16.67
14.29
12.50
11.11
10.00
$90.00
85.00
80.00
75.00
74.00
75.00
77.14
81.25
86.67
93.00
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.75
97.78
103.00
- $100
- 59
- 8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
$ 131
131
131
131
131
131
131
131
131
131
Marginal
Cost
90
80
70
60
70
80
90
110
130
150
The
same profit
maximizing
result!

24. Average
Total
Cost
0
1
2
3
4
5
6
7
8
9
10
Total
Product
Average
Fixed
Cost
Average
Variable
Cost
Price =
Marginal
Revenue
Total
Economic
Profit/Loss
$100.00
50.00
33.33
25.00
20.00
16.67
14.29
12.50
11.11
10.00
$90.00
85.00
80.00
75.00
74.00
75.00
77.14
81.25
86.67
93.00
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.75
97.78
103.00
- $100
- 59
- 8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
$ 131
131
131
131
131
131
131
131
131
131
Marginal
Cost
90
80
70
60
70
80
90
110
130
150
Graphically

25. $200
150
100
50
0
CostandRevenue
1 2 3 4 5 6 7 8 9 10
MC
MR
AVC
ATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
Profit Maximization Position

26. $200
150
100
50
0
CostandRevenue
1 2 3 4 5 6 7 8 9 10
MC
MR
AVC
ATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
MR = MC
Optimum
Solution
Profit Maximization Position

27. the MR=MC rule still applies
If the price is lowered
from $131 to $81…
…but the MR = MC point
changes.
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position

28. $200
150
100
50
0
CostandRevenue
1 2 3 4 5 6 7 8 9 10
MC
MR
AVC
ATC
Economic Loss
$81.00
$91.67
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position

29. $200
150
100
50
0
CostandRevenue
1 2 3 4 5 6 7 8 9 10
MC
MR
AVC
ATC
$71.00
MARGINAL REVENUE-MARGINAL COST APPROACH
Short-Run Shut Down Point
Minimum AVC
is the Shut-Down
Point

30. MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
Price
Quantity
Supplied
Maximum Profit (+)
Or Minimum Loss (-)
Observe the impact upon
profitability as price is
changed
$151
131
111
91
81
71
61
10
9
8
7
6
0
0
$+480
+299
+138
-3
-64
-100
-100

31. CostandRevenue,(dollars)
MC
MR1
AVC
ATC
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run Supply
Do not
Produce –
Below AVC
Break-even
(Normal Profit)
Point

32. CostandRevenue,(dollars)
MC
MR1
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run Supply
Yields the
Short-Run
Supply Curve
Supply
No
Production
Below AVC

33. MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
AVC2
MC2
Higher Costs Move the
Supply Curve to the Left
CostandRevenue,(dollars)
MC1
AVC1
Quantity Supplied
S1
S2

34. MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
AVC2
MC2
Lower Costs Move
the Supply Curve
to the Right
CostandRevenue,(dollars)
MC1
AVC1
Quantity Supplied
S1
S2

35. P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MCs
IndustryFirm
(price taker)
Economic
Profit
$111$111
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” its
Price from the Industry Equilibrium

36. P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MCs
IndustryFirm
(price taker)
Economic
Profit
$111$111
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” its
Price from the Industry Equilibrium
How about the
long-run?

37. PROFIT MAXIMIZATION IN THE LONG RUN
Assumptions...
• Entry and Exit Only
• Identical Costs
• Constant-Cost Industry
Goal of the Analysis
Price = Minimum ATC
Long-Run Equilibrium - The
Zero Economic Profit Model

38. Temporary profits and the reestablishment
of long-run equilibrium
S1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
MR
D1

39. An increase in demand increases profits…
MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Economic
Profits
S1

40. New competitors increase supply, and lower
prices decrease economic profits.
MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Zero Economic
Profits
S1
S2

41. Decreases in demand, losses, and the
reestablishment of long-run equilibrium
S1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D1
MR

42. A decrease in demand creates losses…
MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Economic
Losses
S1

43. MR
D1
MC
ATC
P
Q100
P
Q100,000
IndustryFirm
(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Return to Zero
Economic Profits
S1
S3
Competitors with losses decrease supply
prices return to zero economic profits.

44. LONG-RUN SUPPLY IN A
CONSTANT COST INDUSTRY
Constant Cost Industry
Perfectly Elastic
Long-Run Supply
Graphically...

45. P
Q
=$50 S
D1
Z1
Q1
D2
Z2
Q2Q3
D3
Z3
100,000 110,00090,000
LONG-RUN SUPPLY IN A
CONSTANT COST INDUSTRY
P1
P2
P3

46. P
Q
=$50 S
D1
Z1
Q1
D2
Z2
Q2Q3
D3
Z3
100,000 110,00090,000
LONG-RUN SUPPLY IN A
CONSTANT COST INDUSTRY
P1
P2
P3
How does an increasing
cost industry differ?

47. P
Q
$55
50
45
S
D1
Y1
Q1
D2
Y2
Q2Q3
D3
Y3
100,000 110,00090,000
LONG-RUN SUPPLY IN AN
INCREASING COST INDUSTRY
P1
P2
P3

48. P
Q
$55
50
45
S
D1
Y1
Q1
D2
Y2
Q2Q3
D3
Y3
100,000 110,00090,000
P1
P2
P3
How does a
decreasing cost
industry differ?
LONG-RUN SUPPLY IN AN
INCREASING COST INDUSTRY

49. P
Q
$55
50
45
S
D1
Y1
Q1
D2
Y2
Q2Q3
D3
Y3
100,000 110,00090,000
P1
P2
P3
What is the long-
run competitive
equilibrium?
LONG-RUN SUPPLY IN AN
INCREASING COST INDUSTRY

50. P MR
Q
MC
ATC
Quantity
Price
Price = MC = Minimum ATC
(normal profit)
LONG-RUN EQUILIBRIUM
FOR A COMPETITIVE FIRM

51. PURE COMPETITION AND EFFICIENCY
Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC

52. PURE COMPETITION AND EFFICIENCY
Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC

53. PURE COMPETITION AND EFFICIENCY
Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC

54. PURE COMPETITION AND EFFICIENCY
Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC

55. Coming Next...
Pure Monopoly
Chapter 24