Learning Objectives

Differentiate perfect competition from other market

structures

Draw and explain the graph showing ATC, AVC, MC,

and MR and determine the profit maximization point

Understand the pricing structure and why the profit

maximization position of a firm in perfect competition
occurs at that point where MR = MC
 What is a Market

A market is a set of conditions in which

buyers and sellers meet each other for the
purpose of exchange of goods and services
for money.
• An actual or nominal place where forces of
demand and supply operate, and where
 buyers and sellers interact (directly or
through intermediaries) to trade goods and
services for money or barter.
 What is Market Structure

The interconnected  characteristics of a market such

as the number and relative strength of buyers and
sellers , level and forms of competition, extent of
product differentiation, ease of entry into and exit
from the market.

The selling environment in which a firm produces

and sells its product defined by  the number of firms
in the market;  the ease of entry and exit of firms,
and  the degree of product differentiation
Market Categories
and
Structures

PERFECT COMPETITION
 Characteristics

Numerous sellers all selling identical products: no

differences in quality, no brands, no advertising

All buyers are well-informed about markets and prices

There is free entry into and exit from the market

No individual seller or buyer can influence the market

price which is determined by the interplay of the market
supply and demand. All are price takers.
Products under Perfect Competition
 Price and Profit in the Short Run

 The individual firm faces a perfectly elastic demand curve,

and that the firm’s supply can all be sold at the market
determined price as shown by the graph below:
 Price and Profit in the Short Run

Marginal revenue (MR) is the increase in total revenue

resulting from a one-unit increase in output. Since the
price is constant in the perfect competition, the
increase in total revenue from producing 1 extra unit
will equal to the price or P = MR.
HYPOTHETICAL CASE:

AVERAGE COST AND REVENUE DATA

OUTPUT AC MC MR AVC Profit/(Loss)
           
2 23 13 17 15 -6
4 21 11 17 13 -4
6 17 8 17 11 0
8 15 10 17 11 2
10 14 12 17 10 3
12 14 17 17 11 3
14 15 20 17 13 2
16 17 28 17 14 0
18 19 35 17 17 -2
20 19 36 17 18 -2

At the market price of P17.00/unit, MC = MR at 12 units of production, the

equilibrium output.
GRAPHICAL ANALYSIS :

Profit Maximization for a Competitive Firm

C The firm maximizes profit

O by producing the quantity
S where MC=MR
T

&

R
E
V
E
N
U
E
OUTPUT

If MC < MR – additional output will increase profit

If MC > MR - decrease in output will increase profit
MC = MR - the short run profit is at the maximum
 References
Mankiw, G.N., (2012). Essentials of Economics 6 th Edition. Harvard University:
South-Western, Cengage Learning
Mastrianna F.V.(2013).Basic Economics 16 th Edition. South-Western Cengage
Learning
McConnel, C. et.al (2012). Economics: Principles, Problems, and Policies (Global
Edition). McGraw Hill Co., Inc.
Paraiso O.C. et.al (2011). Introduction to Microeconomics, Mutya Publishing House,
Inc.
Stock W.A., (2013) Introduction to Economics: Social Issues and Economic Thinking

Internet Sites:
http://www.businessdictionary.com/
http://economicsconcepts.com/
www.economicsonlinetutor.com
https://ph.images.search.yahoo.com
http://www.intelligenteconomist.com/
http://www.investopedia.com/