Market StructurePerfect CompetitionMicroeconomic Foundation Alaleh Mani. Eng.

Perfect Competition Many Sellers and Many Buyers Identical Products, no unique characteristic No restriction to enter All are well informed of prices Older firms have no advantages to new

ones Minimum Efficient Scale is relatively low=

portion of demand Price taker

Competition Demand and Supply

Perfect competition Total Revenue

TR is linear and pass the origin (0,0)

Perfect Competition Decision 4 key decision to maximize the profit

2 Short -run Decision: Given that firm’s plant size and No of competitors

are fixed:1. Quit temporary or produce 2. How to produce

2 Long – run Decision:Given that firm’s plant size and No of competitors are variable:

1. Change the size of plant2. Stay or quit

Break Even Points= zero economic profit

MC=MR

Break Even Points= = zero economic profit

MR

MC

Three Possible Outcome in Short-run

Break EvenClose to long term Price

Abnormal Profit

Short Run Supply Curve

Firms survive the fixed cost or economic loss in short runIndifferente between producing 0 and Q1

Firm Industry

Market Equilibrium In Short Run there is only demand

changes

DD3

D2

Long Run Adjustment 1 Entry (in abnormal profit) and Exit is a respond of

firms to economic loss or profit taste and Technology Decreasing demand of

paper ,increasing microwave utensils (CFA 2009)-quantity of Industry increase but individual q decrease and VSVS

ATC

Long Run Adjustment 2 Changing Plant Size is to minimize the costs for

gaining more profit or escape from loss. Due to taste and Technology Equilibrium

rarely happens

Scale back or downsizing

External Economy and External Diseconomy

Long Run supply Curve in Competition market:

LSExternal Diseconomy

External Economy

LS

LS

D0 D21

2

3

3

3