Pure Competition Review Chapter 23 www.textbooksfree.org
I. Overview
A. A purely competitive market exists when
the number of independently acting buyers and sellers
is so large that individual participants have no affect on
market price and quantity.
B. Products sold are virtually identical. Agricultural products such as potatoes and wheat
are examples of competitively sold products.
C. Pure competition industries as defined is difficult to find because some
monopoly power usually exists.
D. Price is determined by intersection of industry supply and
demand.
E. Individual firms are
Price
Takers as they inherit a horizontal
demand-marginal revenue curve from
their industry.
1. A firm can not sell above market as products
are identical and no one will buy higher than
market.
2. There is no reason to sell below market
as it would
mean less revenue and less profit.
F. PC making a profit.
A.
Competition is
efficient.
1.
Price settles where LRATC is at its lowest point
indicating goods are produced efficiently.
2.
P = MR = MC indicating that resources are allocated efficiently as the $'s spent by consumers
(P) = the $'s received by producers (MR) = the $ cost of producers (MC) and economic profit is zero.
B. Shortcomings of Competition
1.
Spillover costs (pollution) and benefits (education) aren't properly measured
resulting in goods
being very and
under produced.
a. Government intervention was needed to lower automobile pollution.
b. Government. props education with grants, inexpensive loan to students/colleges.
2.
Monopoly power develops to negate Adam Smith's
"invisible hand" of
competition
which is required to assure that the purely competitive
adjustment occurs.
3.
Eliminating economic profit makes it difficult for competitive firms to afford
expensive R & D
and technology.
C. Competitive supply
a. A firm's MC curve is its
short-run supply curve.
b. Industry supply is the
horizontal summation of the firm's supply curves