Perfect Markets
Two types of markets in an economy:
If firm is price taker it must accept
Perfect
price given by market
Imperfect
The more perfect a market is the greater competition If firm is price maker it can set
market price by fixing quantity
Definition/Characteristics of a perfect market supplied
Many buyers and many sellers
No barriers to entry or exit
Homogeneous/identical products
Perfect information Perfect market is unrealistic and is used to
compare real world markets to
No government intervention
o Many Buyers and Many sellers:
buyers and sellers(firms) have no market power
No single seller can change market price by the quantity it supplies
Each seller sells a tiny portion // each buyer buys a smaller fraction
o No barriers to entry or exit
New firms can enter without extra cost
New firms have immediate access to same technology, FoPs and info.
Also freedom of exit i.e. no sunk costs
A sunk cost is a cost of production that the firm cannot recover should it leave
the industry i.e. advertising costs
o Homogeneous/Identical parts
All firms produce exact same product
No difference in service/packaging
Consumers decide on which firm to back purely on price
If firms have high prices consumers will go elsewhere
If firms have low prices they won’t maximize profit
o Perfect information
All firms have perfect information
Buys know where they can get each product at lowest price
Sellers know where to find FoPs at lowest cost
o No government intervention
Gov. don’t intervene with aim to set prices
, Individual business and industry
Market structure:
Is the way a market is organized based on characteristics such as the number and strength of
buys & sellers, amount of competition, the amount of product differentiation and ease of
entry and exit from the market.
Each perfectly competitive firm is a price taker
Market structure: Reminder
Short run is a time period where there is at least one fixed cost
Long run is a time period where there are no fixed costs
Total cost (TC) = Variable costs(VC) + Fixed costs(FC)
Fixed costs do not change
Variable costs do change as amount of output changed
The graph on the left is a perfectly competitive MARKET and the graph on the right is a
perfectly competitive FIRM
At Po the Q demanded by buys is cost
Total the same as Q supplied by sellers
Average
The rightTotal
showsCost firms=set Quantity
the(ATC) price, as it is a price taker and takes the price given to it
by the market
¿ cost s
Average Fixed Cost (AFC) = Quantity
Variable cost s
Average Variable Cost (AVC) = Quantity
Marginal cost (MC) = change in total cost when the firm produces an extra unit of output
TC
( cost of producing an additional unit) Q
Total Revenue (TR) = Price x Quantity
Total revenue
Average revenue (AR) = Quantity = Price
Two types of markets in an economy:
If firm is price taker it must accept
Perfect
price given by market
Imperfect
The more perfect a market is the greater competition If firm is price maker it can set
market price by fixing quantity
Definition/Characteristics of a perfect market supplied
Many buyers and many sellers
No barriers to entry or exit
Homogeneous/identical products
Perfect information Perfect market is unrealistic and is used to
compare real world markets to
No government intervention
o Many Buyers and Many sellers:
buyers and sellers(firms) have no market power
No single seller can change market price by the quantity it supplies
Each seller sells a tiny portion // each buyer buys a smaller fraction
o No barriers to entry or exit
New firms can enter without extra cost
New firms have immediate access to same technology, FoPs and info.
Also freedom of exit i.e. no sunk costs
A sunk cost is a cost of production that the firm cannot recover should it leave
the industry i.e. advertising costs
o Homogeneous/Identical parts
All firms produce exact same product
No difference in service/packaging
Consumers decide on which firm to back purely on price
If firms have high prices consumers will go elsewhere
If firms have low prices they won’t maximize profit
o Perfect information
All firms have perfect information
Buys know where they can get each product at lowest price
Sellers know where to find FoPs at lowest cost
o No government intervention
Gov. don’t intervene with aim to set prices
, Individual business and industry
Market structure:
Is the way a market is organized based on characteristics such as the number and strength of
buys & sellers, amount of competition, the amount of product differentiation and ease of
entry and exit from the market.
Each perfectly competitive firm is a price taker
Market structure: Reminder
Short run is a time period where there is at least one fixed cost
Long run is a time period where there are no fixed costs
Total cost (TC) = Variable costs(VC) + Fixed costs(FC)
Fixed costs do not change
Variable costs do change as amount of output changed
The graph on the left is a perfectly competitive MARKET and the graph on the right is a
perfectly competitive FIRM
At Po the Q demanded by buys is cost
Total the same as Q supplied by sellers
Average
The rightTotal
showsCost firms=set Quantity
the(ATC) price, as it is a price taker and takes the price given to it
by the market
¿ cost s
Average Fixed Cost (AFC) = Quantity
Variable cost s
Average Variable Cost (AVC) = Quantity
Marginal cost (MC) = change in total cost when the firm produces an extra unit of output
TC
( cost of producing an additional unit) Q
Total Revenue (TR) = Price x Quantity
Total revenue
Average revenue (AR) = Quantity = Price
