Pure Competition

how do businesses operate in a particular market

based on the level of competition the business encounters in the market of the commodity they manufacture or sell

what is contributed in the business the market operates in

how the business sets prices and decides on levels of output

name the different types of market structure

• pure competition

• monopolistic competition

• oligopoly

• pure monopoly

what differentiates the different market structures 

• number of firms in the industry 

• production of standardised or differentiated product 

• difficulty to enter or exit the industry 

what are the characteristics of a pure competition

• a very large no. of firms

• homogenous product

• very easy access to entry

• no non-price competition

• no control over the price

give an example of a pure competition

agriculture produce

what are the characteristics of a monopolistic competition

• many firms

• heterogenous differentiated product

• relative easy conditions to entry

• non-price competition: considerable emphasis on advertising, brand names and trademarks

• some control over the price

give an example of a monopolistic competition 

retail, clothing, fast food 

what are the characteristics of an oligopoly

• few firms

• heterogenous or homogenous

• significant obstacles of getting entry

• non-price competition: typically great deal

• limited control over price by interdependence

give an example of an oligopoly

cars, bank services

what are the characteristics of a monopoly

• one firm

• unique product

• access to entry is blocked

• non-price competition: mostly public relations, advertising

• considerable control over price

give an example of a monopoly 

eskom

how are the number of sellers in a pure competition

• very large number of independently acting sellers

• offering products in large national or international markets

how is the standardised product in a pure competition

• identical or homogenous product

• if price is the same, consumers will be indifferent about which seller to buy from

• no non-price competition techniques

how is access to entry in a pure competition 

no significant legal, technological, financial or other obstacles entering the market 

what is the elasticity of demand in a pure competition 

perfectly elastic demand of an individual firm 

why does a pure competition have perfect elasticity of demand of an individual firm

the firm cannot obtain a higher price by restricting its output nor can it increase its sales volume by decreasing its price

why is the market demand a downward sloping curve

an entire industry can still affect price by changing the total output

the individual firm cannot affect…

the price of the product it is supplying

what does the interaction of market supply and demand determine 

the price that applies to all firms operating in this industry 

why is the firm’s demand curve also its AR curve

the price per unit to the purchaser is also its revenue per unit

how do you calculate average revenue (AR)

TR/Q = PxQ/Q

how do you approach profit maximising in the short run

• TR - TC

• MR - MC

when will total increase when profit maximising in the short run

it will increase with output but the rate of increase varies

when is TC=TR

when the two curves intersect

break-even point

the level of output where the firm makes normal profit but not an economic profit

when does maximum output occur 

when the vertical distance between TR and TC is the greatest 

what is the focus on the MR - MC approach

the decision of the firm to increase or decrease production

when will a firm make economic profit

if the price is greater than ATC

when will a firm make economic loss but continue to produce

• if price is greater than ATC

• if price is less than ATC

shut down point 

price = AVC

when will a firm shut down

if the price < AVC

supply curve shows…

the relationship between price and quantity

when is there a relationship between price and quantity

• firm makes economic profit

• firm makes normal profit

• firm is minimising its losses

the supply curve is the…

upward sloping part of the marginal cost curve above the AVC

what happens when AVC is tangent to the AR curve

firms will shut down because there is no longer a relationship between price and quantity

what will perfectly competitive firms make in the long run

normal profit

what happens if firms enjoy profits

• it is a signal for other firms to enter the market 

• this will erode all profits until a normal profit is reached