Pure Competition

Lecture Notes
One-page printable

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.

Unit I. Review PC requires many independent competitors selling virtually identical products.

From chapter 22 on Understanding Profit

II. Purely Competitive Adjustment
    A. Suppose industry demand and supply yield an equilibrium price P at which a firm's economic profit is zero.
        1. Step 1 An increase in demand to D' causing economic profit.
        2. Step 2 Market entry is relatively easy increasing industry economic profit draws in new firms
            increasing supply to S', lowering and economic profit disappears.
        3. This automatic purely competitive adjustment causes long-term economic profit
             for pure competition move toward zero.
        4. Many feel a zero long run economic profit represents an ideal economic model
            as all the company earns is a normal return on investment.

Review Price equal ATC where MR = MC with no profit

     B. Suppose a Purely Competitive Company Makes a Profit
            1. Price is higher than average total cost so total is greater than total cost.
            2. Cost includes a reasonable return on investment called "normal profit"
               so under this definition of cost, any profit is an excess.

Review PC making a profit doesn't last long a people see the abnormal profit and try to get some.

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Political Economy Stuff

Examples

1. Post WW2 International Economic Competitive Adjustment

2. Mark Blyth: Competitive Adjustment in European Market Area at 1 min

3. Competitive Adjustment Applied to Trumpism begins at 4 min 15 sec

Competition in the Grocery Business,
Finance-Not-So-Much

Source
U.S. Economic Growth Over? from economist.com

Videos
1.Profit Maximization for a Competitive Firm D. Kaufman Wisconsin-Parkside.

2. Profit Maximization in Perfect Competition F. MacLauchlan

3. Perfect Competition Graphing Practice Econ in 60 seconds

3. Perfect Competition in the Long Run from Econ in 60 seconds

4. Market Equilibrium in the Long Run from Dennis Kaufman Wisconsin-Parkside

5. An Invisible hand provided by competition, regulates the market.

III. Economic Analysis of Pure Competition
      A. Competition is efficient.
           1. Price settles where long-run ATC is at its lowest point indicating goods are produced efficiently.
           2. P = MR = MC indicating that resources are allocated efficiently as
               $'s spent by consumers (P) = the
               $'s received by producers (MR) = the
               $ cost of producers (MC) and
               economic profit is zero.
      B. Shortcomings
          1. Spillover costs (pollution) and benefits (education) aren't properly measured resulting in
              goods being over and under produced.
              a. Government intervention was needed to lower automobile pollution.
              b. Governments supports education with grants and inexpensive loan problems to students and 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 technology.
          4. Economic Growth Volatility

Application
Question Is Purely Competitive Adjustment Causing a New Normal Or
Is The New Normal Not New or Normal?

Beginning with economic expansion caused by WWII, demand for U.S. manufactured goods increased dramatically. As a result, demand increase from D to D.' Profits maximization resulted. Thanks in part to Unions, these manufactures shared their excess profits with unionized workers and wages increases spilled over to many nonunion workers. It took Germany, England and Japan many years to repair war damaged manufacturers and bring an end to U.S. manufacturer's monopoly power.

Serious competition from foreign manufacturers beginning with automobiles and steel increased supply causing Rust Belt Industries to lose their pricing power. This eliminated excess profits. Some industries incurred a loss as supply increased too much. Wage give backs began and many workers found themselves with stagnating wages. Companies used technology and outsourcing to be more competitive and maintain profit but this put pressure on wages.

This also happened in the finance industry with competition coming from foreign banking and cheap Internet trading. Their attempt to increase D for their services with exotic products like derivatives has not worked out well as of 07/01/10.

The bottom line is the standard of living enjoyed by U.S. citizens, their micro-lives, will grow more slowly as it is forced to share the wealth with people from around the world. We may even have to give some back because of our energy dependence and recent decadence though increased production of energy with shale has lessened lessen this dependency. But we will still enjoy the highest standard of living in the industrialized world.

IV. Competitive Supply
   A. The firm's MC curve is its short-run supply curve.
   B. Industry supply is the horizontal summation of the firm's supply curves.
   C. Economics: Long Run Supply - Cliffs Notes analyzes the affect of long term supply on efficiency.

   Unit V Review requires many independent resource suppliers competing with virtually identical factors

V. Other theories of the Competitive Model (from Wiki requires calculus)
     A. Bertrand competition
     B. Cournot competition requires calculus.

VI. U.S. Competitiveness Declines

Econintersect: The U.S. slipped to seventh place in the ranking of economic competitiveness in the 2012.
source the WEF (World Economic Forum). Last year the U.S. ranked fifth.
The current result marked the fourth year of decline for the country that used to rule the competitiveness roost.

More from econintersect.com.

IMD Disagrees with its 2012 World Competitiveness Rankings

Editor's comment on free trade
Free trade increase supply which forces price down resulting in
some combination of lower profit or lower cost.

Owners and managers&inspire good at maintaining profit and will try to lower the cost of
materials, labor or overhead. Workers often bear the brunt of this process.

The effect of Covid on Globalization is dramatically changing trade

Question Is Recovery from the Great Recession indicating
A Few US Company Still Dominate, Many Do Not
        Technology will continue to make our macro-lives better,
          especially now that the Asians are contributing with their
          R&D investments and collaborative competition in science
          helped by the Internet has accelerate scientific advancement.
          Plus gains from science are often cumulative and while not a
          straight line upward they eventually make our macro lives better.
          Think childhood diseases being cured and smart phones.
          Plus its always good remember the best things in life will continue
          to be free and having enough money is a function of demand,
          not supply. 08/12/11 updated 8/24/15
          See Promises, promises (3 graphs)

     See US Economic Normality 1945-2015 page 2,
             World Changed and Good Jobs Disappeared
             20th Century U.S. Decade Ranking

VII. Readings
      A. For a conservative view of competition Read Pure and Perfect"
           Competition? from Capitalism Magazine By What Standard?
      Part 5 in a Series of articles on Capitalism, Free-competition,
           Antitrust, and Microsoft, By Richard M. Salsman
      B. Present Day Application of the Purely Competitive Adjustment
      C. Collaboration Competition is the New Competition

Citizen Well-Being is Important and Continually Grows.
     1) Our society's stability has consistently increased US productivity
          which is key to individual well-being. Think how the public safety net
          has increased since the 1930's and the success of the federal
          children's bureau. Think economic distress in Russia, Europe,
          and even Japan.

     2) Scientific achievements have continuously added to citizen
          well-being. Think public health, smart phones with loads of
          free stuff not part of GDP or wages, streaming audio-
          video, Gillette Stadium ... See Health Problems Solved
     3) Personal Income which is a function of nature and Think nurture has
          increased continuously if not always rapidly. Russia, China,
          and Europe's really slow recovery from the Great Recession.
          Source Economic Wellbeing

Some Successful Companies Pay Everyone Well

from economist.com 01/12/1 and 10/1/16

D. SWITZERLAND tops the latest competitiveness ranking from the World Economic Forum

Best known for its annual shindig in Davos (a Swiss ski resort). It is closely followed by Singapore. Finland has topped Sweden to third place. Of the big emerging economies, China remains on top, with Brazil moving up.

The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labor markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.

Editors Note: Comparing the U.S. to anyone other than Germany and Japan is difficult as others are either small or developing. Plus we get a benefit from our being the world's currency which accrues from our being easily the world's strongest military and industrial nation. China assembles parts from all over Asia and has a way to go to be considered in this group.

A Growing Nation from Turning Point in American History
depicts 19th American Capitalism at Work

Editor's Note: S&P 500 volatility depicts the problem of growth volatility systemic to capitalism.
This puts pressure on monetary and fiscal policy especially as the first is better at controlling inflation and
the later better increasing a lagging Aggregate Demand .

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