The Dynamics Of The Imperfect Market

1. THE DYNAMICS OF PERFECT MARKET
TOPIC: PERFECT MARKET
PRESENTED BY: MSOMI NH
NGEMA LO

2. INTRODUCTION
(WHAT IS A MARKET 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.

3. WHAT IS A PERFECT 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.

4. CHARACTERISTICS OF A PERFECT
MARKET
TOOL BOX
 NUMBER OF BUSINESS
 NATURE OF A PRODUCT
 MARKET ENTRY
 CONTROL OVER PRICE
 INFORMATION
 DEMAND CURVE
 EXAMPLES

5. NATURE OF THE PRODUCT
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.

6. NUMBER OF BUYERS AND 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.

7. MARKET ENTRY
Producers may enter 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.

8. MARKET INFORMATION
All buyers and 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.

9. DEMAND CURVE
The demand curve is horizontal, where demand = average revenue =
marginal revenue.

10. ADDITIONAL CHARACTERISTICS
Profit and loss.
Factors of production are completely mobile.
Efficient transport and communication.
No preferential treatment or discrimination.
No collusion.

11. Perfectly Competitive Firms are “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.

12. Profit Maximization in the 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.

13. Profit Maximization in the 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.

14. Profit Maximization in the 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.

15. CONCLUSION
 The characteristics of 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.