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MARKETSTRUCTURES
TherearefourmarketstructuresontheLeavingCertcourse.Theyare
1) PerfectCompe??on
2) ImperfectCompe??on
3) Oligopoly
4) Monopoly
Theydifferonthebasisof
1) Pricechargedtotheconsumer
2) Thenumberoffirmsintheindustry
3) TheamountofMarketPowerenjoyedbyeachfirm
4) Theefficiencyoftheiropera?ons
5) TheprofitsearnedbythefirmintheLongRun
Therearemanyassump?onsusedtodefineanddescribeeachmarket
structureandthesemustbelearnedoffanden?relyunderstoodinorder
toansweranyques?ononamarketstructure.
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LCEconomicswww.thebusinessguys.ie©
PERFECTCOMPETITION
PerfectlyCompe44veMarket:isamarketwhereiden?calgoodsare
providedbyalargeamountofsmallsellerswhoarepricetakerstoa
largenumberofbuyers.
Assump4ons
1) Therearealargenumbersofbothbuyersandsellersinthe
market:Eachindividualbuyerandselleractsindependentlyandno
individualbuyerorsellerbytheirownac?onscaninfluencethe
marketpriceofthegood.FirmsarePriceTakers.
2) Theproductthateachfirmproducesishomogenous:Thismeans
thatthegoodsbeingproduced/soldbyeachfirmisiden?caltothe
goodsbeingproduced/soldbyeachotherfirmintheindustry.
Thereforetheoutputofonesupplierisaperfectsubs?tuteforthe
outputofanyothersupplierandassuchmostPerfectly
Compe??vefirmsdonotengageinadver?sing.
Theimplica?onofthefirsttwoassump?onsisthateachfirmina
PerfectlyCompe??vemarketisaPriceTaker.Thismeansthatthe
individualfirmmustacceptthepriceasitissetonthemarket.
PriceTaker:Thismeansthattheindividualfirmmustacceptthepriceas
itissetonthemarket.Thereasonbeingisthateachfirmsuppliessuch
a?nyfrac?onofthemarketitcannotinfluencethemarketprice.
3) ThereisfullknowledgeofbothProfitsandPrices:Thismeansthat
everybodybothinsideandoutsidetheindustryknowswhateach
firmintheindustryisearningasrevenueandpayingoutascosts.
Also,consumersarefullyawareofthepricesbeingchargedforthe
products.
4) Thereisfreedomofentryandexitintoandoutoftheindustry:
Firmsalreadyintheindustrycannotpreventnewfirmsfrom
enteringtheindustry.Therearenobarrierstoentryandthecostof
enteringorexi?ngtheindustryareclosetoorequaltozero.
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Assump?ons3and4implythatnofirminaperfectlycompe??ve
industrycanearnsupernormalprofitinthelongrun.Thisisbecause
whenfirmsoutsidetheindustryseethatfirmsinsidetheindustryare
earningsupernormalprofit(fullknowledgeofprofitsandcosts)theywill
entertheindustry(freedomofentryandexit)inordertoearnsomeof
thatsupernormalprofitforthemselvesandassuchtheSNPiscompeted
away.
5) FirmsareProfitMaximisers:Thegoalofeachfirmistoearnas
muchprofitaspossible.Eachfirmdoesthisbyproducingthe
quan?tyofoutputwhereMC=MR.(MarginalCost=Marginal
Revenue),MCisrisingfastera\erthatpointandcutsMRfrom
below.
6) FirmsfaceaPerfectlyElas4cSupplyofFactorsofProduc4on:Ifa
firmwishestoincreaseoutput,itcanacquirethenecessaryfactors
ofproduc?onattheexis?ngprice.I.e.Anincreaseinthedemand
forfactorsofproduc?on,inPerfectCompe??on,doesnotcause
anincreaseintheirprice.
7) NoCollusionExistsontheMarket:Nocollusionexistsbetween
buyersorsellersofthegood.Buyersdonotgrouptogetherwith
otherbuyersorsellersdonotgrouptogetherwithothersellersin
ordertoinfluencethepriceatwhichthegoodissold.
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PriceDetermina4on
Weknowfromtheassump?onsthatafirminperfectcompe??onisa
pricetaker.Thismeansthatthefirmacceptorchargethemarketprice.
Ifafirmincreasesprice,quan?tydemandedwillfalltozeroasconsumers
switchtothecheaperiden?calgoodsavailable.Thesinglefirm,byits
ownac?ons,cannotinfluencethemarketpricebecausethesinglefirm
representssuchasmallpropor?onofthetotalsupply.
OnceweacceptthatthefirmisaPriceTakerandmustchargetheprice
thatisdeterminedbythemarketotherwise,thefirmssaleswillfallto
zeroasthefirmisundersoldbytheirmanycompe?tors,theques?on
mustbeasked,“WhatDeterminesthePricethatthesePricetakers
Charge?”
Theanswerliesintheintersec?onoftheMarketDemandandMarket
Supplycurves.Theequilibrium,foundbytheintersec?onofthesecurves,
determinesthepricechargedbyeachindividualfirm.Italsoderivesthe
demandcurvefacedbyeachfirm
P
DemandCurveofaPerfectlyCompe44veFirm
MarketDemand
SM
DemandCurveof
P
andSupply
theIndividualFirm
D=AR=MR
PM
DM
QM
Q
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WecanseeformtheabovediagramthatdemandcurveforaPerfectly
Compe??vefirmisPerfectlyElas?c.Thisisbecausethereareahuge
numberofperfectsubs?tutesavailable,astherearemanyfirms
supplyingtheexactsamegoodasthefirminques?on.However,when
askedtoexplaintheshapeofthedemandcurveinperfectcompe??on,
writethefollowing.
ExplaintheshapeoftheDemandCurveforaPerfectlyCompe44ive
Firm(LearnThis):Afirminperfectcompe??onisapricetaker.This
meansthatthefirmacceptorchargethemarketprice.Ifafirmincreases
price,quan?tydemandedwillfalltozeroasconsumersswitchtothe
cheaperiden?calgoodsavailable.Thesinglefirm,byitsownac?ons,
cannotinfluencethemarketpricebecausethesinglefirmrepresents
suchasmallpropor?onofthetotalsupply.Assuch,aPerfectly
Compe??vefirmfacesaPerfectlyElas?c(Horizontal)DemandCurve.
SomeExtra(butmaybeunnecessary)PointsabouttheDemandCurve
foraPerfectlyCompe44veFirm(Justread,don’tlearn)
Therearemanyimportantpointstonoteaboutthedemandcurvefora
PerfectlyCompe??vefirm.
1) ThePerfectlyCompe??vefirm’sdemandcurveisPerfectlyElas?c.
Therefore,ifaPerfectlyCompe??vefirmchangesitspricei.e.
abovethatofthemarketprice,itsdemandwilldroptozero.Thisis
duetothefactthattherearemanysellersintheindustryandthe
goodsbeingsoldarehomogenous.Therefore,aconsumerwillsee
thatthefirmischargingahigherpricethanotherfirmsinthe
industry,andgotoadifferentfirmtobuytheexactsamegood.
2) Thedemandcurvefacedbythefirmisahorizontalline.Thismeans
thatthefirmcansellalltheoutputitwantsatthemarketprice.
Becauseofthisnofirmwilllowerpriceasitcansellinfinite
quan?tyatthemarketpriceresul?nginnoincen?veforthefirmto
lowerprice.
3) ThefirmsDemandCurveisequaltoitsMarginalRevenueCurve.
I.e.theyaretheexactsameline,andassuchMR=P.
NOTE:ThedemandcurveislabeledD/MR/AR.AR=Average
Revenue.ItiscalculatedbydividingTotalRevenuebytheQuan?ty.
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AR=
TR
Q
=
PXQ
Q
=
PXQ
Q
=
P
Fromnowon,thinkoftheDemandcurveastheAverageRevenue
curve.TheAverageRevenuecurveistheexactsameasthe
demandcurve,it’sjustadifferentname.
TheProcessofHowFreeMarketsLeadtoEfficiency
Itisatthispointthatwepauseforsomebackgroundand
explana?on.Ini?ally,mosttheoriesineconomicscamefromthe
assump?onofPerfectCompe??on,whichwearecurrently
studying.Whatisabouttobeexplainedtoyouoverthenextfew
pagesis,essen?ally,thetheoryofhowthemarket(theinterac?on
ofprivateconsumersandproducers,unhinderedbygovernment
involvement)naturallybringssociety’sscarceresourcestotheir
mostproduc?veuse(thatusewhichbestsa?sfiesthepreferences
ofconsumers,givensociety’sscarceresources).
Havingsociety’sresourcesusedintheirmostefficientmanner
allowsformoregoodsandservicestobeproducedthanwould
occurunderanyothersystem(CentrallyPlanned,MixedEconomy
etc).Whenmoregoodsandservicesareproduced,eachfamilyor
householdhasmoregoodsandservicestoenjoy.Inshort,the
standardoflivingrises.
Essen?ally,theentrepreneur’sdesireforprofit,combinedwiththe
factthatinefficientfirms(firmsthatearnaloss)areforcedoutof
theindustry,ensurethatsociety’sresourcesareputtotheirbest,
wealthproducinguse,whichensuresthehigheststandardofliving
forsociety,givenitsscarceresources,nomaierhowplen?fulor
limitedtheseresources(factorsofproduc?on)maybe.
Finally,whatfollowsistheprocessofamarketeconomy.Youneed
onlyreadthroughthistogaingreaterunderstanding,notlearnit
off.Onceyouhavereadthroughthenextfewpagesanumberof
?mesandfeelyouunderstandtheprocessofSNPleadingtoentry
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intotheindustry(market),Lossleadingtoexitoutoftheindustry
(market),andhowpricebringsthemarketintoequilibrium,then
justskipoverthesefewpagesandlearnoffthethreeques?onsat
theend.Whatyouwillhavetolearnoffare
1) Theequilibriumposi?onofaPerfectlyCompe??veFirminthe
ShortRun.
2) Theimpactoftheentryofnewfirmsonfirmscurrentlyinthe
industry.
3) Theequilibriumposi?onofaPerfectlyCompe??veFirminthe
LongRun.
Now,letsmakeastart.
ShortRunEquilibriumPosi4onofaPerfectlyCompe44veFirm
P/C
MC
!
AC
!
PMARKET
C1
D=AR=MR
SNP
E
Q1
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1)
2)
3)
4)
5)
P
Explana4onoftheProcess
Fromtheassump?onsweknowthataPerfectlyCompe??ve
firmisaProfitMaximiser.Thereforetheyproduceattheprofit
maximizingoutputwhereMC=MR(andMCcutsMRfrom
belowandMCisrisingfastera\erthatpoint).
Intheshortrunthefirmwillbeinequilibriumproducingthe
profitmaximisingquan?tyQ1andchargingpricePMarket.
ThereareSupernormalProfitsbeingearnedrepresentedbythe
bluebox.
Fromtheassump?onsweknowthatthereisperfectknowledge
andthereisfreedomofentryandexit(assump?ons3and4).
ThereforefirmsoutsidetheindustryareawarethatSNPisbeing
earnedandentertheindustryinordertoearnthisSNP.
Asotherfirmsentertheindustry,thiscausesanincreasein
marketsupplyresul?nginanoutwardshi\inthemarketsupply
curve.
Industry
S1
FIRM
P
MC
!
AC
!
S2
D1
PM1
D2
LOSS
PM2
D
QM1
QM2
Q
Q2 Q1
6) Aseachfirmisapricetaker,itmustchargethepricegoverned
bytheintersec?onofMarketDemandandMarketSupply
curves.
7) WiththeMarketSupplycurveshi\ingtotheright,fromS1toS2,
thisresultsinalowerpricefacedbyeachindividualfirm.The
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industryprice(andassuchthepricethefirmmustchargeas
theyarepricetakers)movesfromP1toP2.
8) AtpricePM2,thisfirmismakingalossasAC>AR,represented
bytheredboxabove.
9) IntheLongrunfirmsmustcoverallofitscosts.Thefactthat
thisfirmissufferingalossmeansthattheyarenotcoveringall
oftheircosts.Therefore,manyfirmswillhavenoop?onbutto
leavetheindustry.Thismeansthatonlythemostefficientfirms
surviveandremainintheindustry.
10)Astheinefficientfirmsleavetheindustry,thereisareduc?onin
MarketSupplycausinganinwardshi\intheMarketSupply
curve.
INDUSTRY
P
FIRM
P
S3
!
AC
MC
!
S2
D3
PM3
PM2
D2
D
QM3
QM2
Q
Q2 Q3
11)Theremainingfirmswilladjusttheiroutputandsupplyquan?ty
Q3(asthisiswhereMC=MRandMCcutsMRfrombelowand
MCisrisingfastera\erthatpoint)andchargethemarketprice
PM3.
12) TheCompe??vefirmisnowinitsLongrunequilibriumposi?on
MC=MR=AC=AR
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Pointstonote(Read,don’tlearn):
1) TheabsenceofSNPintheLongrunmeansthatthereisno
incen?vefornewfirmstoentertheindustry.
2) Thefactthattheefficientfirmsthatstayedintheindustryare
earningnormalprofitmeansthattheywillcon?nuetostayin
theindustry.
3) Theentryandexitoffirmsisthemechanismbywhichthe
Longrunindustryequilibriumisreached.
IfSNPisbeingearned=Firmsentertheindustry
Iflossesarebeingearned=Firmsleavetheindustry
IfNormalProfitisbeingearned=Neitherentryorexit
4) Thisprocessofentryandexitwillcon?nueun?lallSNPbeing
earnedintheindustryhasbeencompetedawayandonlythe
mostefficientfirmsremainintheindustry.
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ShortRunEquilibriumofaPerfectlyCompe44veFirm(LearnThis)
P/C
!
PMARKET
C1
MC
!
E
SNP
AC
D=AR=MR
Q1
Explana4on
1) Equilibrium:OccursatpointEwhereMC=MRandMCisrising
andcutsMRfrombelow.
2) PriceCharged&OutputProduced:Thefirmproducesoutput
Q1andsellsitatpricePMARKETonthemarket.
3) Costofproduc4on:Thecostofproducingeachunitofoutputis
C1.
4) SuperNormalProfits:ThisfirmisearningSNP’s–represented
bytheshadedareaabove.TheyareearningSNP’sbecause
AR>AC.
5) WasteofScarceResources:Becausethefirmisnotproducingat
thelowestpointoftheACcurveitiswas?ngscarceresources.
Also,thefirmisearningagreaterrewardthanisnecessaryto
keepthefirmintheindustryinthelongrun(SNP),andassuch
isinefficient.
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TheImpactwhichtheEntryofNewFirmshasontheMarketand
ontheEquilibriumposi4onoftheFirm(LearnThis)
INDUSTRY
P
FIRM
S1
P
S2
!
AC
MC
!
P1
P2
P2
D=AR=MR
DM
Q
Q2
Explana4on
1. Marketsupplycurveshi\souttotherightasmorefirmsenter
theindustry.
2. Thiscausesthemarketpricetofall.
3. TheIndividualfirm’sDemandCurvefalls,whichforcesthefirm
toloweritsprice(PerfectlyCompe??vefirmsarePriceTakers).
4. Firmwillnowproduceasmallerquan?ty.
5. AmountofSNP’searnedwillcon?nuetofallun?ltheyare
eliminated.
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LongRunEquilibriumofaPerfectlyCompe44veFirm(LearnThis)
P
!
MC
!
PM/C1
AC
D=AR=MR
E
Q1
Explana4on
1) Equilibrium/ProfitMaximisa4on:occursatpointEwhere
MC=MR(MCisrisingandcutsMRfrombelow).
2) PriceandQuan4ty:ThelevelofoutputproducedisQ1andthe
pricethefirmsellsthisoutputatisPM.
3) Costs:Theaveragecostofproduc?onisshownatpointE.The
averagecostofproduc?onisC1.
4) Profit:ThisfirmisearningnormalprofitsbecauseAR=AC.
5) Efficiency:ThefirmisproducingatthelowestpointofACcurve
whichshowsthatthefirmismakingthebestuseofitsscarce
resources.Thefirmisproducingatthemostefficientlevelof
outputpossible.Also,thefirmisearningonlynormalprofit,
whichistheminimumpaymentnecessarytokeepthe
entrepreneurinthebusinessintheLongRun.
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TheSupplyCurveforaPerfectlyCompe44veFirm
Thefollowingfourpagesarejustforunderstanding.Whenthesepages
havebeenreadandareunderstood,justlearnoffthedefini?onson
pages17and18.
Thesupplycurveforafirmshowsthequan?tyofagoodorservicethata
firmiswillingandabletosellatdifferentprices.Fromtheassump?ons
weknowthatfirmsinPerfectCompe??onareprofitmaximisersand
alwaysproducewhereMC=MR,MCisrisingandcutsMRfrombelow.
Fromthecostshandout,werememberthat,forafirmtosurviveinthe
shortrunithastocoveritsVariableCosts(VC)andmakesome
contribu?ontoitsFixedCosts(FC).Let’slookatthegraphbelow.
P/C
AC
MC
!
D
P4
C
P3
AVC
B
P2
P1
AR4/MR4
X
AR3/MR3
AR2/MR2
A
AR1/MR1
Q2
Q3 Q4
Quan?ty
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Remember,afirminPerfectCompe??onproduceswhereMC=MRand
MCisrisingandcutsMRfrombelow(ProfitMaximisers).
1) AtpriceP1,MC=MRatpointAandpointX.However,atpointX
MCisfallingandassuchthisisnotapointofprofitmaximisa?on
astheprofitmaximisa?oncondi?onisMC=MRandMCisrising.
Therefore,thefirmwouldproduceatpointA,whereMCisrising.
AtpointA,thefirmisnotevencoveringitsVariableCosts(VC)and
assuchthefirmcannotstayinbusinessevenintheshortrun.
Thereforethefirmshutsdownandnoquan?tyissupplied.
2) AtpriceP2,MC=MRatthepointB.AtpointB,thefirmiscovering
itsVariableCosts(VC)andisabouttomakesomecontribu?onto
itsFixedCosts(FC).Atthisposi?on,thefirmcanstayinbusinessin
theshortrunbutnotthelongrun.Thefirmsuppliesquan?tyQ2.
3) AtpriceP3,MC=MRatpointC.AtpointC,thefirmiscovering
bothFixedCosts(FC)andVariableCosts(VC),[thisisallofthe
firms’costsasTotalCosts(TC)=(FC)+(VC)]andisearningNormal
Profit.NormalProfitistheminimumpaymentrequiredtokeepthe
entrepreneurintheindustryinthelongrun.Itisalsothelongrun
equilibriumposi?onofaPerfectlyCompe??vefirmandatthis
pointthefirmsuppliesquan?tyQ3.
4) AtpriceP4,MC=MRatthepointD.AtthepointD,thefirmis
coveringallofitscostsandisearningSuperNormalProfit(SNP).At
thisprice,thefirmsuppliesquan?tyQ4.Fromtheassump?onswe
knowthatthereisfullknowledgeofprofitsandcostsandfreedom
ofentryandexit.IffirmsintheindustryareearningSNP,other
firmswillentertheindustryun?ltheSNPiscompetedaway.
Therefore,pointDisonlyshortrunequilibriumandnotlongrun
equilibrium.
Theques?oniswhatdowetakefromthis?Theanswerliesinthe
followingdefini?ons.
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ShortRunSupplyCurveforaPerfectlyCompe44veFirm
TheShortRunSupplyCurve:ofaPerfectlyCompe??vefirmisthatpart
ofitsMarginalCostcurvewhichliesabovetheAverageVariablecost
curve(AVC).
P/C
MC
AVC
Quan?ty
Again,westressthatintheshortrunafirmonlyhastocoveritsVariable
Costs(VC)andmakesomecontribu?ontoitsFixedCosts(FC).Ifthe
marketdeterminesapriceequaltooraboveafirm’sAverageVariable
Costs(AVC)atanygivenquan?ty,thenthefirmwillsupplythatquan?ty
whereMC=MR(andMCisrisingandcutsMRfrombelow).Thisis
becausethefirmisaprofitmaximiser.Aswassaidbefore,thepriceis
determinedbythemarketandthefirmcan’taffectthisprice.The
DemandCurveforafirminPerfectCompe??onissimplyastraightline
acrossfromthepricesetbytheMarket(theintersec?onoftheMarket
DemandCurveandtheMarketSupplyCurve),andthepriceandmarginal
revenuearethesamethingforaPerfectlyCompe??vefirm.Thequan?ty
suppliedisdeterminedbytheintersec?onoftheMCandMRcurves.As
suchtheshortrunsupplycurveforaPerfectlyCompe??vefirmisthat
partofitMCcurveabovetheAverageVariableCost(AVC)curve.
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LongRunSupplyCurveforaPerfectlyCompe44veFirm
TheLongRunSupplyCurve:ofaPerfectlyCompe??vefirmisthatpart
ofitsMarginalCostcurvewhichliesabovetheAverageTotalCostcurve
(AC).
P/C
MC
AC
Quan?ty
Again,westressthatinthelongrunafirmhastocoverallofitscosts,
thatisitsTotalCosts(TC).Ifthemarketdeterminesapriceequaltoor
aboveafirm’sAverageCosts(AC)atanygivenquan?ty,thenthefirmwill
supplythatquan?tywhereMC=MR(andMCisrisingandcutsMRfrom
below).Thisisbecausethefirmisaprofitmaximiser.Aswassaidbefore,
thepriceisdeterminedbythemarket(theintersec?onoftheMarket
DemandCurveandtheMarketSupplyCurve)andthefirmcan’taffectthis
price.TheDemandCurveforafirminPerfectCompe??onissimplya
straightlineacrossfromthepricesetbytheMarket,andthepriceand
marginalrevenuearethesamethingforaPerfectlyCompe??vefirm.The
quan?tysuppliedisdeterminedbytheintersec?onoftheMCandMR
curves.AssuchthelongrunsupplycurveforaPerfectlyCompe??vefirm
isthatpartofitMCcurveabovetheAverageCost(AC)curve.
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AdvantagesofPerfectCompe44on(ReadThis,don’tlearnthis)
1) Efficiency:Inthelongrun,aPerfectlyCompe??vefirmproduce’s
attheminimumpointoftheAverageCost(AC)curve.Thisisthe
mostefficientlevelofproduc?onpossibleaseachresourceis
beingusedtoitsfullpoten?alwhichensuresthatresourcesarenot
beingwasted.Also,PerfectlyCompe??vefirmsdonotengagein
compe??veadver?sing,whichinitselfiswastefulofresourcesasit
raisescoststothefirmbutitdoesn’timprovetheproductorlower
thepricetotheconsumer.
2) LowPricesfortheConsumer:Inthelongrun,Perfectly
Compe??vefirmsearnnormalprofit.Thisistheminimum
paymentrequiredtokeeptheentrepreneurintheindustryinthe
longrun.ThefactthatSNPisnotbeingearnedinthelongrun
ensuresalowerpricetotheconsumer.Also,PerfectlyCompe??ve
firmsproduceattheminimumpointoftheACcurve,thuskeeping
coststoaslowastheycanbe.Forthesetworeasons,the
consumerfacesalowerpriceinPerfectCompe??onthanitwould
bechargedunderanyothermarketstructurebyafirmfacingthe
samecosts.
3) Quan4ty:Thequan?typroducedinaPerfectlyCompe??vemarket
isgreaterthanthequan?tymadeavailableinamonopoly,
ensuringalowerprice(thisisbecausesupplyisgreater),assuch
ensuringahigherstandardoflivingforeveryoneinsociety
AdvantagesofPerfectCompe44on(LearnThis)
1) LowPrices:Thefirmsellsitsproductsatthelowestpossibleprices.
2) Efficient:Thefirmproducesatthelowestpointofaveragecostsso
thereisnowasteofscarceresources.
3) NoAdver4sing:Asthegoodsarehomogeneousthereisnoneedfor
wastefuladver?sing.
4) NormalProfitsEarned:Becausefreedomofentryexistsnofirmwill
con?nuetoearnSNPsinthelongrunasnewfirmswillenterand
competethisSNPaway.Thereforethereisnoexploita?onof
consumers.
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PerfectCompe44onandAdver4sing
WestatedearlierthatPerfectlyCompe??vefirmsdonotengagein
compe??veadver?sing.Wewillnowlookatwhythisisso.
Compe44veAdver4sing:isadver?singthatpromotesthefeaturesofan
individualfirm’sproductoverthoseofcompe?ngfirms.
1) ProductsareHomogenous:Asthegoodsbeingsoldbyfirmsina
PerfectlyCompe??vemarketaretheexactsame,thereisnopoint
inclaimingthatonefirm’sproduceisbeierthananother’s.
2) RaiseMarketSalesratherthanIndividualFirm’sSales:Asthe
goodsbeingsoldbyonefirmarethesameasthegoodsbeingsold
byallotherfirmsintheindustry,anyfirmthatengagedin
adver?singwouldincurthecostsoftheadver?singbutraisethe
salesofallfirmsintheindustryasthesefirmsselliden?calgoods.
3) Compe44veAdver4singincreasesCosts:Inthelongrun,
Perfec?velyCompe??vefirmsareefficientanddonotwaste
resources.Aswehavealreadyestablished,itwouldbewastefulof
resourcesforasinglefirmtoengageincompe??veadver?sing.As
suchfirmsarenotwillingtowastemoneyoncompe??ve
adver?sing.
EventhoughfirmsinPerfectCompe??ondon’tengageincompe??ve
adver?sing,allthefirmsmightpooltheirresourcestogetherandshare
thecostofgenericadver?sing.
GenericAdver4sing:referstoadver?sementsthatpromotequali?es/
featuresofaproductwithoutnamingaspecificsupplieroftheproduct.
ForGenericadver?sing,allthegoodsproducedbyallfirmsinanindustry
arepromotedwithoutanypar?cularfirm’sgoodsbeingpromoted.This
benefitsallfirmsinperfectcompe??onbecauseallgoodsproducedare
homogenousandassuchthisraisesthedemandforallgoodsinthe
industrywhilesharingthecostsofadver?singbetweeneachfirm.E.g.
“eatcheese”,“drinkmilk”.
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WhydoesPerfectCompe44onbenefittheConsumer?
TheConsumerbenefitsbecausepricesarekepttoaminimum.This
achievementisaccomplishedfortworeasons.Firstly,firmsinPerfect
Compe??ondonotearnSNPintheLongrunasonlyNormalProfitis
requiredtokeeptheentrepreneurintheindustryintheLongrun.
Secondly,firmsinPerfectCompe??onproduceatthemostefficientlevel
ofproduc?onpossible,theminimumpointoftheACcurveensuringthat
thesefirmscanselltheirproductstotheconsumeratlowerprices.Also,
marketforceswithinPerfectCompe??onacttocorrectanytemporary
imbalancesensuringthatconsumersdonotfaceanyshortagesorgluts.
WhydoesPerfectCompe44onbenefittheEconomy?
PerfectCompe??onbenefitstheeconomybecausetheeconomic
resourcesofthecountryarebeingusedintheirmostefficientmanner
possible.PerfectlyCompe??vefirmsproduceattheminimumpointof
theACcurveandearnNormalProfitintheLongrun,ensuringthatthe
FactorsofProduc?onintheeconomyarebeingusedattheirmost
efficientlevelandtheconsumerisnotbeingovercharged.
InPerfectCompe44on,areEmployeeslikelytoreceiveEconomicRent?
NO.IntheLongrun,workersinPerfectCompe??onarenotlikelyto
receiveEconomicRent.Theassump?onsof1)FreedomofEntryandExit
and2)FullKnowledgeofProfitsandCosts,ensurethatfirmscanonly
earnNormalProfitandthatcostsareataminimum,intheLongrun.
Therefore,intheLongrun,PerfectlyCompe??veworkerswillonlyreceive
theirsupplypriceandnoeconomicrentisearned.
JonathanTraynor20