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 8/7/16   Please 

I. Overview PC requires many independent competitors selling virtually identical products.
II. A Purely Competitive Company Making a Profit doesn't last long a people see the abnormal profit and try to get some.
III. Purely Competitive Adjustment entry and exit of firms keeps profit near zero. See Present Day Application
IV. Economic Analysis of Pure Competition price equal ATC where MR = MC with no profit
 V. Competitive Supply requires many independent resource suppliers competing with virtually identical factors
VI. Other Theories of the Competitive Model Bertrand Competition and Cournot Competition (requires calculus) 
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 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. 

 

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. 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
               profit.
           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 un 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-Parkside.
     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.

F. Book 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 .

See US Economic Normality 1945 2015     page 2 and

World Changed and Good Jobs Disappeared

  

from economist.com 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

 wef-global-competitiveness-2012

 

 

 

 

 

 

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 econintersect.com.

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. Please   
      D. 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.

 

 

 
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 from Turning Point in American History  
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

Please

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