Blank Monopoly Oligopoly Monopolistic Perfect Competition Competition 1. Ability to set Price setter Price setter Price setter Price taker price 2. Price level Very high High High Low 3. Entry conditions No entry Limited entry Free entry Free entry 4. Number of firms 1 Few Few or many Many 5. Long-run profit greater than or equal to 0 greater than or equal to 0 0 0 6. Strategy dependent on individual rival firms’ behavior No (has no rivals) Yes Yes No (cares only about market price) 7. Products Single product May be differentiated May be differentiated Undifferentiated 8. Example Producer of patented drug Automobile manufacturers Plumbers in a small town Apple farmers

Competitive Firms and Markets Chapter 8 ”PERFECTLY” COMPETITIVE FIRMS When you were younger did you babysit, deliver papers, or mow lawns for money? If so, you faced stiff competition from other competitors who offered identical services. There was nothing to stop others from offering their services too. All of you charged the “going rate.” If you tried to charge more, your customers would simply buy from someone else. These conditions are very similar to the conditions agricultural growers face. Learning Objectives Perfect Competition Describe the characteristics of perfect competition Competition in the Short Run Identify the competitive equilibrium and derive the short-run supply curve Competition in the Long Run

Contrast the short-run and long-run competitive equilibria and supply curves Calculate short and long run profit maximization PERFECT COMPETITION IS A MARKET STRUCTURE IN WHICH BUYERS AND SELLERS ARE PRICE TAKERS. A price-taking firm cannot affect the market price for a product, It faces a horizontal demand and it sells at the market price. Characteristics of a Perfect Competitive Market Large Number of Buyers and Sellers If the sellers in a market are small and numerous, no single firm can raise or lower the market price. Identical Products Buyers perceive firms sell identical or homogeneous products. Granny Smith apples are identical, all farmers charge the same price. Full Information Buyers know the prices charged by all firms and that products are identical. No single firm can unilaterally raise its price above the market equilibrium price. Perfect Competition

Negligible Transaction Costs Buyers and sellers do not have to spend much time and money finding each other or hiring lawyers to write contracts to make a trade. Perfectly competitive markets have very low transaction costs. Free Entry and Exit The ability of firms to enter and exit a market freely in the long run leads to a large number of firms in a market and promotes price taking. it is used as a benchmark to make a comparative analysis with real markets. T Totals Approach to Profit Maximization To maximize profit, a producer finds the largest gap between total revenue and total cost. © 2005 Prentice Hall Business Publishing Survey of Economics, 2/e O’Sullivan & Sheffrin Marginal Approach to Profit Maximization Perfect Competition Analysis For a perfectly competitive firm:P = MR = AR P = 20 TR = 20Q MR = 20 AR = TR/Q = 20 Marginal approach to profit maximization in the Short Run Two-step decision-making process to determine how to maximize profit. How Much to Produce