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Competitive Markets
Microeconomics for Business
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The Perfect Competition Model
• Sellers are price-takers• Sellers do not behave strategically• Entry into the market is free• Buyers are price-takers
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Market Structure
• Large number of buyers• Large number of sellers, each with negligible
market share• Homogeneous products• Well informed buyers• No barriers to entry
mmkt
firm
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Short Run Equilibrium
• Short run market demand is less price elastic than long run
• A fixed number of firms in the market• Firms operating on their short run supply
curves• Market supply is sum of each firm’s supply
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Market & Firm Equilibrium (SR)
Qty
£
MCSR
P1
ACSR
Qty
£
P1
SSR
DSR
X1x1
Firm Market
C1
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Long Run Equilibrium
• Long run market demand is more price elastic than short run
• Number of firms in the market is not fixed– new firms can enter (attracted by economic
profits)– loss-making firms can leave
• Firms operating on their long run supply curves
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Long Run Equilibrium
Assume that:• All existing and potential new firms have
access to same technology and hence face the same costs
• Input prices remain constant regardless of number of firms in the market: i.e. constant cost industry
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Market & Firm Equilibrium (LR)
Qty
£
MCLRACLR
P*
Qty
£
SLR
DLR
X1
Firm Market
x1
P*
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Increasing Cost Industry
• As number of firms in the industry increases, input prices and hence long run average costs rise
• So long run market supply curve is upward sloping
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Decreasing Cost Industry
• As number of firms in the industry increases, input prices and hence long run average costs fall
• So long run market supply curve is downward sloping
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Efficiency of Competition
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