8. Pure Competition
Lecture Notes
1. There are several models of market structure, these include:
a. pure competition (atomized competition, price taker, freedom of entry &
exit, no nonprice competition, standardized product)
b. pure monopoly (one seller, price giver, entry & exit blocked, unique
product, nonprice competition)
c. monopolistic competition (large number of independent sellers, pricing
policies, entry difficult, nonprice competition, product differentiation)
d. oligopoly (very few number of sellers, often collude, often price leadership,
entry difficult, nonprice competition, product differentiation)
1. all assume perfect knowledge
2. Assumptions of Pure Competition:
a. large number of agents
b. standardized product
c. no non-price competition
d. freedom of entry & exit
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, e. price taker
3. Revenue with a price taking firm:
a. average revenue and marginal revenue are equal for the purely
competitive firm because price does not change with quantity.
b. total revenue is P x Q which is the total area under the demand curve (up
to where MR = MC) for the purely competitive firm.
4. The profit-maximizing rule is that a firm will maximize profits where Marginal Cost
is equal to Marginal Revenue.
a. MC = MR
b. Where MC = MR; revenue is at its maximum and costs are at their
minimum.
5. Model of the purely competitive industry:
The purely competitive industry is the supply and demand diagram presented in
chapter 4.
44
Lecture Notes
1. There are several models of market structure, these include:
a. pure competition (atomized competition, price taker, freedom of entry &
exit, no nonprice competition, standardized product)
b. pure monopoly (one seller, price giver, entry & exit blocked, unique
product, nonprice competition)
c. monopolistic competition (large number of independent sellers, pricing
policies, entry difficult, nonprice competition, product differentiation)
d. oligopoly (very few number of sellers, often collude, often price leadership,
entry difficult, nonprice competition, product differentiation)
1. all assume perfect knowledge
2. Assumptions of Pure Competition:
a. large number of agents
b. standardized product
c. no non-price competition
d. freedom of entry & exit
43
, e. price taker
3. Revenue with a price taking firm:
a. average revenue and marginal revenue are equal for the purely
competitive firm because price does not change with quantity.
b. total revenue is P x Q which is the total area under the demand curve (up
to where MR = MC) for the purely competitive firm.
4. The profit-maximizing rule is that a firm will maximize profits where Marginal Cost
is equal to Marginal Revenue.
a. MC = MR
b. Where MC = MR; revenue is at its maximum and costs are at their
minimum.
5. Model of the purely competitive industry:
The purely competitive industry is the supply and demand diagram presented in
chapter 4.
44
