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Competitive Markets

Microeconomics for Business

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The Perfect Competition Model

• Sellers are price-takers• Sellers do not behave strategically• Entry into the market is free• Buyers are price-takers


Market Structure

• Large number of buyers• Large number of sellers, each with negligible

market share• Homogeneous products• Well informed buyers• No barriers to entry

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firm


Short Run Equilibrium

• Short run market demand is less price elastic than long run

• A fixed number of firms in the market• Firms operating on their short run supply

curves• Market supply is sum of each firm’s supply


Market & Firm Equilibrium (SR)

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MCSR

P1

ACSR

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P1

SSR

DSR

X1x1

Firm Market

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Long Run Equilibrium

• Long run market demand is more price elastic than short run

• Number of firms in the market is not fixed– new firms can enter (attracted by economic

profits)– loss-making firms can leave

• Firms operating on their long run supply curves


Long Run Equilibrium

Assume that:• All existing and potential new firms have

access to same technology and hence face the same costs

• Input prices remain constant regardless of number of firms in the market: i.e. constant cost industry


Market & Firm Equilibrium (LR)

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MCLRACLR

P*

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SLR

DLR

X1

Firm Market

x1

P*


Increasing Cost Industry

• As number of firms in the industry increases, input prices and hence long run average costs rise

• So long run market supply curve is upward sloping


Decreasing Cost Industry

• As number of firms in the industry increases, input prices and hence long run average costs fall

• So long run market supply curve is downward sloping


Efficiency of Competition
