M7: PURE COMPETITION

• Market Structures are different compositions of sellers that sell similar products but distinguish the quality of these products.
• Market is a place where buyers and sellers meet.
• Industry is a collection of firms producing the same good.
• DETERMINANTS OF MARKET STRUCTURE IN AN INDUSTRY:

  • Number of firms
  • Ease of entry
  • Substitutability
• PURE COMPETITION represents a market that has a very large number of sellers, standardized product, price takers, free entry and exit, and perfectly elastic demand.
• Price Takers have no control over the price of the product. The price of its products is determined by market supply and demand conditions over which the firm has no influence.
• TWO APPROACHES OF SHORT RUN MAXIMIZATION:

  > Total Revenue - Total Cost Approach

  > Marginal Revenue - Marginal Cost Approach
• Constant-cost Industry => an industry in which expansion by the entry of new firms has NO EFFECT on the prices firms in the industry must pay for resources and thus NO EFFECT on production costs.
• Increasing-cost Industry => an industry in which expansion through the entry of new firms raises the firms in the industry must pay for resources and therefore increases their production costs.
• Productive efficiency => requires that goods be produced in the leastcost way.
• Allocative efficiency => requires that resources be apportioned amongfirms and industries to yield the mix of products and services that ismost wanted by society (least-cost production at each level of outputassumed.