Chapter 23  Pure Competition

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.
updated 9/23/16  


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I. Overview
II. A Purely Competitive Company Making a Profit
III. Purely Competitive Adjustment
   Present Day Application
IV. Economic Analysis of Pure Competition
V. Competitive Supply
VI. Other theories of the Competitive Model

VII. Readings 

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 industries as defined is
       difficult to find because some monopoly
       power usually exists.
  D. Price is determined by intersection of
       industry supply and demand.
  E. Individual firms are Price Takers as they 
       inherit a horizontal demand-marginal
        revenue curve from their
        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


Learn Why "We're Different" is the 
Battle Cry of All Companies

Adjacent advertisements in an 1885 newspaper for the makers of two competing ore concentrators (machines that separate out valuable ores from undesired minerals). The lower ad touts that their price is lower, and that their machine's quality and efficiency was demonstrated to be higher, both of which are general means of economic competition.

From chapter 22 on Understanding Profit


II. A Purely Competitive Company Making a Profit

A. Price is higher than average total cost so total
        is greater than total cost. 
    B. Cost includes a reasonable return on
        investment called "normal profit" so under this
        definition of cost, any profit is an excess.
    C. Videos 

        1. Profit Maximization for a Competitive Firm
            from Dennis Kaufman Wisconsin-Parkside.
        2. Profit Maximization in Perfect Competition
            by Fiona Maclachlan
        3. Perfect Competition Graphing Practice
           from Econ in 60 seconds


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
           2. Market entry is relatively easy and
               this profit draws in new firms in-
               creasing 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. Many feel a zero long run economic
        profit represents an ideal economic
        model as all the company earns is a
        normal return on investment.


     B. Perfect Competition in the Long Run 
 from Econ in 60 seconds
     C. Market Equilibrium in the Long Run  
    from Dennis Kaufman Wisconsin-
     D. An Invisible hand
provided by
              competition, regulates the market.


E. A Growing Nation shows how
production costs change over time,
    explored in
explored in chapter 21
    affects this analysis.

FBook Summaries Internet Library
     political section reviews Hoodwinked,
     book by John Perkins who feel
     international corporations are altering
     capitalism as practiced today.

         E. Application

Is Purely Competitive Adjustment Causing 
a New Normal Or Is The New Normal Not New

Because the Old Normal Was Not Normal?

Beginning with economic expansion caused by WWII, demand for U.S. manufactured goods increased dramatically.  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. It took Germany, England and Japan many years to repair war damaged manufacturers and bring an end to U.S.  manufacturer's monopoly power.

Serious competition from foreign  manufacturers beginning with  automobiles and steel increased supply causing Rust Belt Industries to lose their pricing power. This eliminated excess profits. Some industries incurred a loss as supply increased too much. Wage give backs began and many workers found themselves with stagnating wages. Companies used technology and outsourcing to be more competitive and maintain profit but this 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 bottom line is the standard of living enjoyed by U.S. citizens, their micro-lives, will grow more slowly as it is forced to 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 with shale has lessened lessen this dependency. But we will still enjoy the highest industrialized world standard of living in the.

Technology will continue to make our macro-lives

from 01/12/13


better, especially now that the Asians are contributing with their R&D investments and collaborative competition in science helped by the Internet has accelerate scientific advancement.  Plus gains from science are often cumulative and while not a straight line upward they eventually 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 updated 8/24/15

Citizen Well-Being is More Important and
should grow more rapidly.

1) Our society's stability has consistently increased
    US productivity which is key to individual well-
    being. Think how the public safety net has
     increased since the 1930's and the success of
     the federal children's bureau. Think economic
    distress in Russia, Europe, and even Japan.
2) Scientific achievements have continuously
     added to citizen well-being. Think public health,
     smart phones, streaming audio-video, Gillette
     Stadium ... See Health Problems Solved
3) Personal Income which is a function of nature
    and nurture has increased continuously if
    not always rapidly. Think Russia, China, and
    Europe's really slow recovery from the Great
    Recession.  Source
    20th Century U.S. Decade Ranking

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
A. For a conservative view of competition Read Pure and Perfect"
          Competition? from Capitalism Magazine By What Standard? 
Part 5 in a Series of articles on Capitalism, Free-competition,
          Antitrust, and Microsoft, By Richard M. Salsman
B. Present Day Application of the Purely Competitive Adjustment
C. Collaboration Competition is the New Competition









U.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


Editor's comment on free trade 
Free trade increase supply which forces price down resulting in some combination of lower profit or lower cost. Owners and managers  are good at maintaining profit
and will try to lower the cost of materials, labor or overhead. Workers often bear the brunt of this process.

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 


Editors Note: Comparing the U.S. to anyone other than Germany and Japan is difficult as others are either small or developing. Plus we get a benefit from our being the world's currency which accrues from our being easily the world's strongest military and industrial nation. China assembles parts from all over Asia and has a way to go to be considered in this group. A Growing Nation


depicts 19th American Capitalism at Work


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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