1. Perfect Competition

2. Objectives By the end of this lesson you should be able to… Define Perfect Competition Explain 2 characteristics of the Perfect Competition model Explain why, in the Perfect Competition model, P=AR=D for a firm Explain the long run equilibrium diagram

3. Starter Mr M’s Perfectly Competitive Carrots!

4. In your notes quickly draw a spider diagram of the key characteristics of market structure Market Structure

5. characteristics Knowledge/ Information Product homogeneity / branding Number of firms Perfect Knowledge – every firm has access to the same info Barriers to entry / exit Products differentiated from competition – easier to control Degree of power of each firm Profit levels New firms (entrants) attracted by abnormal profits Market concentration EoS Sunk costs Legal Limit pricing Anti-comp practices

6. Market Structure More competitive (fewer imperfections) Perfect Competition Pure Monopoly

7. Market Structure Less competitive (greater degree of imperfection) Perfect Competition Pure Monopoly

8. Market Structure Perfect Competition Pure Monopoly Monopolistic CompetitionOligopoly Duopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm.

9. So Perfect Competition Is a model of an extreme market structure Which is based on certain assumptions

10. Basic Assumptions Many small sellers each of whom produces an insignificant percentage of total market output and thus exercise no control over the market price Many individual buyers – no control over the market price No barriers to entry/ exit Homogenous product – perfect substitutes. This leads to firm being passive ‘ price takers ’ and facing a perfectly elastic demand curve for their product. No externalities arising from production and/or consumption which lie outside the market

11. Many small firms each of whom produces an insignificant percentage of total market output and thus exercise no control over the market price P Q O D SP Q O P = D = AR Price takers…so small and so many – individual firms cannot influence price The firm’s demand curve is perfectly e l a s t i c because any firm that raises its prices sees demand fall to zero as consumers, with perfect knowledge, switch to other producers offering an identical product for a better price IndustryFirm

12. Homogenous goods/services Products perceived to be identical Perfect substitutes Consumers buy from cheapest provider Each firm is a passive price taker Firms face perfectly e l a s t i c demand curve for its product

13. Perfect Information Consumers have readily available info about the market – prices and products from competing suppliers Can access info at zero cost Few transaction costs involved in searching for price info

14. No barriers to entry /exit No sunk costs Entry and exit from the market feasible in the long run If firms are making abnormal profits, new firms can easily enter the market This assumption ensures all firm make normal profits in the long run Freedom of entry and exit

15. Your go… Taking the characteristics of perfect competition insert ticks to express the degree to which each of the markets displays them…

16. Real examples of Perfect Competition – FX Market Currency markets – taking us closer to perfect competition Global FX markets are where all buying and selling of world currencies takes place. 24x5 trading $4 trillion daily trade value vs New York Stock Exchange: $37bln $4,000,000,000,000 vs. $37,000,000,000

17. Why does a currency market come close to perfect competition? Homogenous product – a dollar is a dollar, a pound a pound, wherever you trade it Many buyers and sellers – all are price takers High quality real-time info and low transaction costs Electronic trading allows buyers and sellers to deal only with those who offer the best prices Thomson Reuters datafeed service delivers price data from the exchange to your office in under a millisecond….1/1000 th of a second!

18. Other examples Commodity markets Softs - grown Wheat, coffee, sugar, cocoa, rice Hards – extracted through mining Metals Gold Oil

19. You will need to reproduce diagrams In an essay or Data Response Need to consider both the individual firm and the market (industry) Investigate firm’s output, price, revenue and profit in both the short and the long run Start with the long run…

20. Long run equilibrium P Q O D SP Q O P = D = AR = MR IndustryFirm P1 Q1 MC AC MR=MC Maximum profits Before we look at the market dynamics, lets first understand what the end state looks like…

21. To recap What are the characteristics of Perfect Competition? Do firms in perfectly competitive markets make a loss? What would the concentration ratio be for a perfectly competitive industry? Why is Perfect Competition rare in reality?

22. Homework...by tomorrow! Learn the characteristics of Perfect Competition Read article: ‘Perfect Competition’ – Does it exist, and does it matter?

23. Plenary By the end of this lesson you should be able to… Define Perfect Competition Explain 2 characteristics of the Perfect Competition model Explain why, in the Perfect Competition model, P=AR=D for a firm Explain the long run equilibrium diagram