1. Pure Competition

2.  Identical product  As long as the price is the same, buyers don’t care which supplier they buy from--- perfect substitutes  Ex- Agricultural products (rice and corn)

3.  Product that differs slightly from competitors’ versions--- preferences exist  Buyers are not indifferent about the seller when the price of the product is the same  Ex- Shoes, dresses, retail

4.  Economists group industries into 4 distinct market structures  1. Pure Monopoly  2. Oligopoly  3. Monopolistic Competition  4. Pure Competition

5.  A market structure in which one firm is the sole seller of a product or service  Entry of additional firms is blocked so one firm makes up the entire industry  They make no effort to differentiate its product  Ex- local utilities- no substitutes

6.  Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors  EX- Water company, electric company, telephone (too expensive to build the networks for competitors)

7.  Involves only a few sellers of a standardized (identical to competitors) or differentiated product  Each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output  Ex- Steel, automobiles, household appliances

8. Relatively large number of sellers producing differentiated products (clothing, furniture, books) Wide-spread non-price competition (product differentiation), a selling strategy in which one firm tries to distinguish its products or service from competitors on the basis of attributes such as design and craftsmanship Ex- Retail stores, shoes

9.  Very large number of firms producing a standardized product (corn)  “Price Takers”- individual firms cannot change the market price, only react to changes  Individuals are at the mercy of the market  Ex- if market price is $2 why sell at $2.05 or $1.95?

10.  Combination of Pure Monopoly, Monopolistic Competition, and Oligopoly  3 grouped together are distinguished from Pure Competition

11.  Demand schedule for individual firm in a purely competitive industry is perfectly elastic at the market price (only 1 price available)  The firm cannot obtain a higher price by restricting output, nor should it lower prices to increase volume

12.  Marginal Revenue, Demand, Average Revenue, and Price, are the same (MR. DARP)  Total revenue increases by a constant (price)  Total revenue curve is upward sloping with constant slope

13. Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data Pure Competition Price and Revenue 24681012 131 262 393 524 655 786 917 1048 $1179 Quantity Demanded (Sold) MR = D = AR = P TR PQDQD MR $131 131 0 1 2 3 4 5 6 7 8 9 10 $0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 ] ] ] ] ] ] ] ] ] ]