Course Code and Title: BACR2 Basic Microeconomics

Lesson Number: 10
Topic: Pure Competition

Pure competition is a market situation where there is a large number of independent sellers
offering identical products. It means it is a term for an industry where competition is
stagnant and relatively non-competitive. Companies within the pure competition category
have little control of price or distribution of products. Pure competition is said to exist in a
market where-

In the sense of perfect competition is not only pure but also free from other perfection. It is a
broader concept of pure competition. The essentials feature of pure competition is the
absence of any monopoly element.

In the word of Chamberlin, pure competition means “competition unalloyed with monopoly
elements,” whereas perfect competition involves “perfection in many other respects than the
absence of monopoly”. It is possible to come across pure competition in real life but not
perfect competition. Structure influences conduct which, in turn, affects performance.

Learning Objectives:

At the end of this lesson, the students will be able to:

1. Discuss the characteristics of pure competition.

2. Explain Revenue of the Firm.

3. Determine the Profit Maximization under pure competition.

Lesson Presentation:

The following are the characteristics of pure competition:

1. There is a large number of independent sellers of a commodity, each too small to affect
the commodity price.

2. All firms in the industry sell homogeneous or identical products. As a result, the buyers
cannot distinguish between the product of one firm and that of another, and so they are
indifferent also the particular firm from which they buy. This refers not only to the physical
characteristics of the products but also to the “environment”, such as the location and
pleasantness of the sellers, etc., in which the purchase on made. Example are agricultural
products like vegetables, root crops, etc.

3. Each individual buyer or seller is a price taker. That is no form can influence the market
Price by deciding to increase or decrease its production and no buyer can influence the
market price by deciding to increase or decrease quantity purchased.

4. There is a free entry and exit of firms into and out of the industry. There are no barriers
like legal, financial and technical requirements.

5. There is no non-price competition like advertising, sales promotion, etc.

An industry is a collection firm. The important characteristics of a purely competitive

industry is that no firm in the industry has no control over the price. Each firm treats the
price as given, independently of any decision the firm makes as to how much of the product
it will sell.

(a)
show the

typical downward sloping demand curve and upward sloping demand curve for the industry.
The industry’s demand curve is inelastic which means that all firms acting at the same time
can affect total supply and market price. More units will be sold at a lower price and vice
versa. Equilibrium in the industry occurs at the price and quantity where D=S.

(b) shows the demand curve of purely competitive firm. It is perfectly elastic at the
equilibrium price. This mean that the firm can sell many units at the equilibrium price,
because buyers can obtain what they want from other firms at the equilibrium price.

Revenue of the Firm

Profit is equal to revenue minus cost. It (after tax) is income that accrues to the owners of
the firm after all expenses are deducted.

Let us assume that the firm sells everything its produce, so in this case, revenue is equal to
value of output which is equal the market price per unit of output times the number of units
produced. Thus,

TR = P X Q

where: TR =Total revenue

P = price
Q = quantity/ output

Given the formula for TR, it is easy to calculate two related measures of revenue namely:

1. Average Revenue (AR) the revenue earned per unit of output.

TR
AR = Q =P

Since TR = P X Q, IT FOLLOWS THAT AR = P ; that is, average revenue per unit is the,
price per unit.

Example: In Table 1, is given the price of P10, total revenue increases as output increases.
for a purely competitive firm, the given price is equal to the firm’s marginal revenue and
average revenue at all level of output.

P Q TR MR AR
10 2 20 10 10
10 4 40 10 10
10 6 60 10 10
10 8 80 10 10
10 10 100 10 10

Table 1.
Demand and Revenue Schedule of a purely
Competitive firm
2. Marginal revenue (MR) is the increase in total revenue earned by producing and selling
more units. Thus,
∆ TR
MR = ∆ Q

TR₂ - TR ₁
MR = Q₂-Q₁

Profit Maximization

Short-run. The short run profit of a purely competitive firm ca be determined by two
approaches:

1. Total Revenue total cost approach. Profit is simply the difference between revenue and
costs. Thus, total profit (π) is obtained by subtracting total cost from total revenue (π = TR –
TC). Total cost is obtained by adding the firm’s total fixed cost and total variable cost (TC =
TFC + TVC).

if TR> TC, the firm is receiving positive pure profit. If TR< TC, the firm is incurring losses. If
TR = TC, the firm is at break- even /normal or zero profit.
Example :
P Q TR TFC TVC TC π /loss
10 0 0 80 0 80 -80
10 20 200 80 170 250 -50
10 40 400 80 320 400 0
10 60 600 80 420 500 100
10 80 800 80 620 700 10
10 100 1000 80 870 950 50

2.

Marginal Revenue = Marginal Cost Approach

maximization in MR = MC Approach, to wit,

a. The firm must select output for which marginal revenue equals marginal cost.
b. The firm should produce in the short run when price exceeds average cost.

Example:
Table 3. Short-run profit maximization: MR = MC Approach

P Q TR TC MR MC AR AC
10 0 0 80 - - - -
10 20 200 250 10 8.5 10 12.5
 10 40 400 400 10 7.5 10 10
10 60 600 500 10 5 10 8.33
10 80 800 700 10 10 10 8.75
10 100 1000 950 10 12.5 10 9.50

Long-run

A firm is in the long-run equilibrium if there I no incentive for firms to enter nor to leave the
industry. It is at the point where price is equal to the long-run marginal cost and marginal
revenue. So, in this case the firm has no incentive to change its plant capacity.
Activity/Evaluation:

I. Multiple Choice: Pick out the letter of the correct answer and write the letter
on the space provided before each number.
_____ 1. Perfect competition is an industry with

a. a few firms producing identical goods.

b. many firms producing goods that differ somewhat.
c. a few firms producing goods that differ somewhat in quality.
d. many firms producing identical goods.

_____ 2. In a perfectly competitive industry, there are

a. many buyers and many sellers.

b. many sellers, but there might be only one or two buyers.
c. many buyers, but there might be only one or two sellers.
d. one firm that sets the price for the others to follow.

_____ 3. In perfect competition, the product of a single firm

a. is sold to different customers at different prices.

 b. has many perfect complements produced by other firms.
c. has many perfect substitutes produced by other firms
d. is sold under many differing brand names.

_____ 4. In perfect competition, restrictions on entry into an industry

a. do not exist.
b. apply to both capital and labor
c. apply to labor but not to capital.
d. Apply to capital but not to labor.
_____ 5. In perfect competition,

a. there are significant restrictions on entry.

b. each firm can influence the price of the good.
c. There are few buyers.
d. All firms in the market sell their product at the same price.
_____ 6. The price elasticity of demand for any particular perfectly competitive firm’s
output is

a. less than 1
b. equal to zero
c. infinite
d. 1

_____ 7. The demand for wheat from farm A is perfectly elastic because wheat from farm A
is an(n)

a. perfect complement to wheat from farm B.

b. normal good
c. perfect substitute for wheat from farm B.
d. inferior good

_____ 8. In perfect competition, the elasticity of demand for the product of a single firm is

a. 0
b. 1
c. infinite
d. Between 0 and 1

_____ 9. In perfect competition, the elasticity of demand for the product of a single firm is
 a. infinite, because many other firms produce identical products.
b. zero, because many other firms produce identical products
c. zero, because the firm produces a unique product.
d. infinite, because the firm produces a unique product.

_____ 10. In perfect competition, an individual firm

a. has a price elasticity of supply equal to one

b. Faces unitary elasticity of demand
c. has a price elasticity of supply equal to infinity
d. faces infinitely elastic demand

II. Given a short-run schedule of a competitive firm. Complete the table.

Q P TR TC FC VC ∆ /loss MC MR AC AR AVC
1 40 59 35
2 40 75 35
3 40 95 35
4 40 120 35
5 40 150 35
6 40 190 35
7 40 245 35

I. Fill on the blanks by referring to the schedule above:

a. The most profitable output is at _______ units.

b. At the MPO:
1) TR is _______.
2) TC is _______ .
3) TFC is _______ .

c. At the MPO:
1) Per unit cost is _______ .
2) Per unit revenue _______ .

d. The firm incurs a loss at _______ units.

 e. The firm earns profit from _______ to _______ units of output.

f. Profit is maximized at the level of output where _______ equals to _______ .

References:

https://www.youtube.com/watch?v=Z9e_7j9WzA0&t=209s

https://www.slideshare.net/CandelaContent/perfect-competition-in-the-long-run