Chapter 23  Pure Competition

I. Overview
II. A Purely Competitive Company Making a Profit
III. Purely Competitive Adjustment
IV. Economic Analysis of Pure Competition

V. Competitive Supply
VI. Other theories of the Competitive Model
VII. Readings  
Class Discussion Question concerns a 
Present Day Application of the Purely Competitive Adjustment
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. Overview

   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


Is Purely Competitive Adjustment Causing a New Norma?

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.

The problem has been compounded by high world-wide savings generated by these new manufacturing countries. It flows into the U.S. pushing up the values of the dollar thus making foreign goods cheaper. Less good jobs results ad cheaper goods from overseas are too often luxury goods.

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 with their R&D investments.  Plus gains from science are often cumulative and while not continually added to our micro lives they make our macro lives better. Think childhood diseases being cured and smart phones. Plus its always good  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 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.

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. Other theories of the Competitive Model from Wikipedia.
        A. Bertrand competition
        B. Cournot competition requires calculus.
VII. Readings
        1. 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
        2. Present Day Application of the Purely Competitive Adjustment


wef-global-competitiveness-2012U.S. Competitiveness Declines

Econintersect:  The U.S. slipped to seventh place in the ranking of economic competitiveness in the 2012. source 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


IMD Disagrees  with its 2012 World Competitiveness Rankings





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 topped 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 labor 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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