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Lecture 13

ECO101H1 Lecture 13: Markets-Perfect Competition

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ECO100 Lecture 13 : Markets Perfect Competition In every market, there is a demand curve In perfect competition, there is also a supply curve Exists only in perfectly competitive markets, not in other markets (i.e. monopoly) Reflects profitmaximizing behaviour Equals a firms MC schedule What is a perfectly competitive market? Many buyers and sellers of an IDENTICAL product Actions of single buyerseller cannot influence MP Firms can enter and exit entry as they wish No barriers to entry or exit Key features Each firm is a PRICE TAKER No capacity to influence price Perfectly elastic demand curve at market price The number of firms is fixed in the short run, but can vary in the long run Insights: Absence of barriers to entry: economic profits cannot persist in long run for firms Each firm is a price taker: faces an infinitely elastic demand at MP Example: Market for Organic Foods (perfectly elastic industry) You are an organic farmer There is a sharp increase in demand for organic foods Will you earn economic profits? Yes More demand, higher price Will these economic profits continue over the long run? No Other farmers switch to organic crops, until economic profits are competed away Insight: For economic profits to persist over the long run, there must be obstacles (barriers to entry) that prevent new firms from entering and competing Perfectly competitive markets probably not a good investment Warren Buffet (famous investor) Looks for companies that have a moat a barrier to entry that prevents other firms from competing away its profits Perfect competition = no moat
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