Microeconomic

BB107
Pure Competition in the Short Run and Long Run

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Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Outcomes
• List the conditions required for purely competitive markets. • Convey how purely competitive firm maximize profits or minimize losses.

• Explain why the marginal cost curve and supply curve are identical.
• Explain how the long run differs from the short run in pure competition. • Explain the differences between constant-cost, increasing-cost, and decreasing-cost industries. • Show how long run equilibrium in pure competition produces an efficient allocation of resources.
LO1

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Four Market Models 1) Pure competition

2) Pure monopoly
3) Monopolistic competition 4) Oligopoly
Pure Monopolistic Competition Competition Oligopoly Pure Monopoly

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LO1

Characteristics of the Four Market Models
Characteristic
Number of firms Type of product Control over price

Pure Competition Very large numbers Standardized None

Monopolistic Competition Many Differentiated Some control Few

Oligopoly

Monopoly One Unique; no close subs. Considerable

Standardized or differentiated Limited by mutual inter-dependence; considerable with collusion Significant obstacles Typically a great deal product differentiation Steel, auto, banking, airlines

Conditions of entry Non-price Competition

No obstacles None

No obstacles Considerable (advertising, brand names, trademarks) Retail trade, dresses, shoes

Blocked Mostly public relation advertising Local utilities
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Examples
LO1

Agriculture

Pure Competition: Characteristics 1. Very large numbers of sellers

2. Standardized product
3. Easy entry and exit 4. Perfect information

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LO2

Pure Competition: Characteristics
Because there are many firms, each firm produces a small portion of the market output. Hence, each firm cannot influence the price. Each firm is a price taker. The firm does not make pricing decisions. The firm...