Pure Competition

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Chapter 23 Pure Competition

Economists Critique America's Education

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Editors Note: Part II Product and Factor Markets introduces this chapter. It contains a concise overview of the four market models discussed in chapters 23-29.

I. Introduction

   A. A purely competitive market exists when the number of independently
       acting buyers and sellers is so large that individual participants have
       no affect on market price and quantity.
   B. Products sold are virtually identical. Agricultural products such as
       potatoes and wheat are examples of competitively sold products.
   C. Pure competition as defined is difficult to find because some monopoly
       power usually exists.
   D. Price is determined by the intersection of industry supply and demand.
   E. Individual firms are Price Taker as they inherit a horizontal demand/
       marginal revenue curve from their industry.
       1. A firm can not sell above market as products are identical and no one
           will buy higher than market.
       2. There is no reason to sell below market as it would mean less revenue
          and less profit.

II. A Purely Competitive Company making a Profit

   A. Profit Maximization for a Competitive Firm from Dennis Kaufman Wisconsin-Parkside.
   B. Profit Maximization in Perfect Competition by Fiona Maclachlan

   C. Econ Concepts in 60 Seconds Video on Perfect Competition Graphing Practice

Has the Purely Competitive Adjustment
Caused a New Normal for wages?
Beginning with the economic expansion caused by WWII, demand for U.S. manufactured goods increased dramatically. It took Germany, England and Japan many years to repair war damaged manufacturers and bring an end to U.S. manufacturers monopoly power. As a result, demand increase from D to D.' Profits maximization resulted. Thanks in part to Unions, these manufactures shared their excess profits with unionized workers and wages increases spilled over to many nonunion workers.
Serious competition from foreign manufacturers, beginning with automobiles and steel, increased supply from S to S'. Rust belt
industries lost all their excess profits and some incurred a loss as supply increased too much to S" (not shown). Wage give backs began and many other workers found themselves with stagnating wages. Companies used technology and outsourcing to be more competitive and this continues to put pressure on wages.

This also happened in the finance industry with competition coming from foreign banking and cheap Internet trading. Their attempt to
increase D for their services with exotic products like derivatives has not worked out well as of 07/01/10.

As a result, the high ever increasing standard of living enjoyed by U.S. citizens, their micro-lives will grow very slowly as we share the wealth with people from around the world. We may even have to give some back because of our energy dependence and recent decadence though increased production of energy and shale lessen this dependency. But we will still enjoy the highest standard of living in the industrialized world and technology will continue to make our macro-lives better, especially now that the Asians are contributing because of their investments in R&D. And, always remember the best things in life will continue to be free and having enough money is a function of demand, not supply. 08/12/11

from economist.com 01/12/13

III. Purely competitive adjustment



    A. Suppose industry demand and supply yield an equilibrium price P
        at which a firm's economic profit is zero.
         1. Step 1 indicates an increase in demand to D' causing economic profit.
         2. Market entry is relatively easy and this profit draws in new firms
             increasing supply to S', Step 2, and economic profit disappears.
         3. This automatic purely competitive adjustment causes equilibrium long
              run economic profit for pure competition to be zero.
         4.To many, zero long run economic profit represents an ideal economic
             model as all the company earns is a normal return on investment.

     B. Econ Concepts in 60 Seconds Video on Perfect Competition
          in the Long Run for AP Econ
   C. View a dynamic model of Market Equilibrium in the Long Run
          from Dennis Kaufman University of Wisconsin-Parkside.
     D. An Invisible hand provided by competition, regulates the market.
     E. How production costs change over time, explored in chapter 21, affects
          this analysis.
     F. The Book Summaries Internet Library political section reviews
         Hoodwinked, book by John Perkins
          who feel international corporations are altering capitalism as practiced
          today.

IV. Economic analysis of pure competition
      A. Competition is efficient.
           1. Price settles where long-run ATC is at its lowest point indicating
              goods are produced efficiently.
           2. P = MR = MC indicating that resources are allocated efficiently as
               $'s spent by consumers (P) = the
               $'s received by producers (MR) = the
               $ cost of producers (MC) and
               economic profit is zero.
      B. Shortcomings
          1. Spillover costs (pollution) and benefits (education) aren't properly
              measured resulting in goods being over and under produced.
              a. Government intervention was needed to lower automobile pollution.
              b. Governments supports education with grants and inexpensive loan
                  problems to students and colleges.
          2. Monopoly power develops to negate Adam Smith's "invisible hand" of
              competition which is required to assure that the purely competitive
              adjustment occurs.
          3. Eliminating economic profit makes it difficult for competitive firms to
              afford expensive R & D and technology.
          4. Economic Growth Volatility

V. Competitive supply
       1. A firm's MC curve is its short-run supply curve.
       2. Industry supply is the horizontal summation of the firm's supply curves.
       3. Economics: Long Run Supply - Cliffs Notes
           analyzes the affect of long term supply on the efficiency of all industries.
VI. For a conservative view of competition Read Pure and Perfect" Competition?
        By What Standard? Part 5 in a Series of articles on Capitalism, Free-competition,
        Antitrust, and Microsoft, By Richard M. Salsman
VII. Other theories of the competitive model from Wikipedia.
        A. Bertrand competition
       B. Cournot competition requires calculus.

U.S. Competitiveness Declines
Econintersect: The U.S. slipped to seventh place in the ranking of economic competitiveness in the 2012 rankin published by the WEF (World Economic Forum). Last year the U.S. ranked fifth. The current result marked the fourth year of decline for the country that used to rule the competitiveness roost.
More from econintersect.com.

IMD Disagrees with its 2012 World Competitiveness Rankings

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SWITZERLAND tops the latest competitiveness ranking from the World Economic Forum, best known for its annual shindig in Davos (a Swiss ski resort). It is closely followed by Singapore. Finland has pipped Sweden to third place. Of the big emerging economies, China remains on top, with Brazil moving up.
The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labour markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.

from The wealth of nations

S and P volatility depicts the problem of growth volatility systemic to capitalism makes puts pressure on monetary and fiscal policy

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Economics Internet Library

II. A Purely Competitive Company making a Profit A. Profit Maximization for a Competitive Firm from Dennis Kaufman Wisconsin-Parkside. B. Profit Maximization in Perfect Competition by Fiona Maclachlan C. Econ Concepts in 60 Seconds Video on Perfect Competition Graphing Practice	Has the Purely Competitive Adjustment Caused a New Normal for wages? Beginning with the economic expansion caused by WWII, demand for U.S. manufactured goods increased dramatically. It took Germany, England and Japan many years to repair war damaged manufacturers and bring an end to U.S. manufacturers monopoly power. As a result, demand increase from D to D.' Profits maximization resulted. Thanks in part to Unions, these manufactures shared their excess profits with unionized workers and wages increases spilled over to many nonunion workers. Serious competition from foreign manufacturers, beginning with automobiles and steel, increased supply from S to S'. Rust belt industries lost all their excess profits and some incurred a loss as supply increased too much to S" (not shown). Wage give backs began and many other workers found themselves with stagnating wages. Companies used technology and outsourcing to be more competitive and this continues to put pressure on wages. This also happened in the finance industry with competition coming from foreign banking and cheap Internet trading. Their attempt to increase D for their services with exotic products like derivatives has not worked out well as of 07/01/10. As a result, the high ever increasing standard of living enjoyed by U.S. citizens, their micro-lives will grow very slowly as we share the wealth with people from around the world. We may even have to give some back because of our energy dependence and recent decadence though increased production of energy and shale lessen this dependency. But we will still enjoy the highest standard of living in the industrialized world and technology will continue to make our macro-lives better, especially now that the Asians are contributing because of their investments in R&D. And, always remember the best things in life will continue to be free and having enough money is a function of demand, not supply. 08/12/11 from economist.com 01/12/13
III. Purely competitive adjustment A. Suppose industry demand and supply yield an equilibrium price P at which a firm's economic profit is zero. 1. Step 1 indicates an increase in demand to D' causing economic profit. 2. Market entry is relatively easy and this profit draws in new firms increasing supply to S', Step 2, and economic profit disappears. 3. This automatic purely competitive adjustment causes equilibrium long run economic profit for pure competition to be zero. 4.To many, zero long run economic profit represents an ideal economic model as all the company earns is a normal return on investment. B. Econ Concepts in 60 Seconds Video on Perfect Competition in the Long Run for AP Econ C. View a dynamic model of Market Equilibrium in the Long Run from *Dennis Kaufman University of Wisconsin-Parkside.* D. An Invisible hand provided by competition, regulates the market. E. How production costs change over time, explored in chapter 21, affects this analysis. F. The Book Summaries Internet Library political section reviews *Hoodwinked*, book by John Perkins who feel international corporations are altering capitalism as practiced today.
IV. Economic analysis of pure competition A. Competition is efficient. 1. Price settles where long-run ATC is at its lowest point indicating goods are produced efficiently. 2. P = MR = MC indicating that resources are allocated efficiently as $'s spent by consumers (P) = the $'s received by producers (MR) = the $ cost of producers (MC) and economic profit is zero. B. Shortcomings 1. Spillover costs (pollution) and benefits (education) aren't properly measured resulting in goods being over and under produced. a. Government intervention was needed to lower automobile pollution. b. Governments supports education with grants and inexpensive loan problems to students and colleges. 2. Monopoly power develops to negate Adam Smith's "invisible hand" of competition which is required to assure that the purely competitive adjustment occurs. 3. Eliminating economic profit makes it difficult for competitive firms to afford expensive R & D and technology. 4. Economic Growth Volatility V. Competitive supply 1. A firm's MC curve is its short-run supply curve. 2. Industry supply is the horizontal summation of the firm's supply curves. 3. Economics: Long Run Supply - Cliffs Notes analyzes the affect of long term supply on the efficiency of all industries. VI. For a conservative view of competition Read Pure and Perfect" Competition? By What Standard? Part 5 in a Series of articles on Capitalism, Free-competition, Antitrust, and Microsoft, By Richard M. Salsman VII. Other theories of the competitive model from Wikipedia. A. Bertrand competition B. Cournot competition requires calculus.	U.S. Competitiveness Declines Econintersect: The U.S. slipped to seventh place in the ranking of economic competitiveness in the 2012 rankin published by the WEF (World Economic Forum). Last year the U.S. ranked fifth. The current result marked the fourth year of decline for the country that used to rule the competitiveness roost. More from econintersect.com. IMD Disagrees with its 2012 World Competitiveness Rankings
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	Last Chapter
	Chapter 23 Class Discussion Questions
	Chapter 23 Homework Questions
	Next Chapter
	Table of Contents
	Economics Internet Library