BAM 040: Managerial Economics

SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Lesson title: Market Structure (Perfect Competition) Materials:

Lesson Objectives: Student Activity Sheets
1. I can define market structure. References:
2. I can enumerate the characteristics of perfect/pure competition. https://online.aurora.edu/types-of-
3. I can explain a perfectly competitive firm’s profit-maximizing market-structures/
choices. Managerial Economics Business
Strategy Ninth Edition by
Baye,Prince,2017
Investopedia.com

“Don’t wait until you’ve reached your goal to be

proud of yourself. Be proud of every step you take
toward reaching that goal”

A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
A pleasant day to you buddy! How’s your quiz last time? I hope you have passed and get a high score.
For this meeting, we will now discuss the market structure. There are several types of market structure
and to begin with, we will tackle today the “Perfect/Pure Competition.

B.MAIN LESSON
1) Activity 2: Content Notes (13 min)

MARKET STRUCTURE

Market structures refer to the different market characteristics that determine relations between sellers
to each another, of sellers to buyers and more. There are several basic defining characteristics of a
market structure, such as the following:
➢ The commodity or item that’s sold and the extent of production differentiation.
➢ The ease or difficulty of entering and exiting the market.
1
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

➢ The distribution of market share for the largest firms.

➢ The number of companies in the market.
➢ The number of buyers and how they work with or against the sellers to dictate price and
quantity.
➢ The relationship between sellers.

A. PERFECT/PURE COMPETITION

Perfect competition describes a market structure, where a large number of small firms compete against
each other. In this scenario, a single firm does not have any significant market power. As a result, the
industry as a whole produces the socially optimal level of output, because none of the firms have the
ability to influence market prices.
The idea of perfect competition builds on a number of
assumptions: (1) all firms maximize profits (2) there is free
entry and exit to the market, (3) all firms sell completely
identical (i.e. homogenous) goods, (4) there are no consumer
preferences. By looking at those assumptions it becomes quite
obvious, that we will hardly ever find perfect competition in
reality. This is an important aspect because it is the only
market structure that can (theoretically) result in a socially
optimal level of output.
We have seen that a perfectly competitive firm’s marginal
revenue curve is simply a horizontal line at the market price
and that this same line is also the firm’s average revenue curve. For the perfectly competitive firm,
MR=P=AR. The marginal revenue curve has another meaning as well. It is the demand curve facing a
perfectly competitive firm.

Rule: Price (P) = Marginal Revenue (MR) = Average Revenue (AR)

Short Run Profit Maximization Long Run Profit Maximization

2
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Total Revenue – Total Cost
Approach
Profit becomes maximum
irrespective of the market situation,
when the difference between total
revenue (TR) and total cost (TC)
becomes the greatest.
Marginal Revenue –
Marginal Cost Approach
The profit-maximizing level of
output is that output level
where MR = MC. This is
known as the MR=MC rule.
In the long-run, firms may enter or
exit the market. For firms operating
in a perfectly competitive market,
equilibrium is achieved when the
long-run marginal cost is equal to
the marginal revenue and price.
LMC = MR = P

Approach # 1. Equilibrium of a Firm—The Total Revenue and Total Cost Approach:

Profit becomes maximum irrespective of the market situation, when the difference between total
revenue (TR) and total cost (TC) becomes the greatest. In the figure, a TR curve for a perfectly
competitive firm has been drawn. The TR curve starts from the origin and it rises in proportion to the
rise in the volume of sales.

Approach # 2. Equilibrium of a Firm—the Marginal Revenue and Marginal Cost Approach:

Irrespective of the market conditions, a firm will stop production if
total revenue falls short of total variable cost. Profit will be
maximized at that point where MR and MC are equal to each
other. For any output MR > MC, the firm will expand output.
Doing so, it will add more to its revenues them to its costs,
thereby increasing profit. On the other hand, for the output MR
>MC means that there is no incentive on the part of the firm to
raise its output. If it decides to increase output when MC > MR, it
will add more to its costs than to its revenues, thus reducing
profit. Hence the profit-maximizing output occurs at that
point when MR = MC.

Activity 3: Skill-Building Activities (20min)

Direction: Complete the table and answer the following questions:

Total Price Total Marginal Average Total Cost Marginal Profit (TR
Product Revenue Revenue Revenue Cost * – TC) *
(Qty.) (P x Q) * (TR/Q) *
0 50 120
1 50 150
2 50 175
3 50 193
4 50 218
5 50 248
6 50 282
7 50 322
8 50 372
9 50 427
10 50 485

3
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Questions:
1. Applying the marginal revenue-marginal cost approach, at what output level does the firm maximize
its profit?
__________________________________________________________________________________
__________________________________________________________________________________

2. Given your answer on # 1, at this output level, how much is the firm’s profit?
__________________________________________________________________________________
__________________________________________________________________________________

3. What can you observe on the price, average revenue and marginal revenue?
__________________________________________________________________________________
__________________________________________________________________________________

4. Can a seller operating under a perfectly competitive firm adjust price at any instance he wants to?
What could be the implication if he adjusts the prices of his products?
__________________________________________________________________________________
__________________________________________________________________________________

Practice Problem
Patricia is a perfectly competitive wheat farmer. Her average
variable cost curve and her marginal cost are shown in the figure.
a. If the price of a bushel of wheat is $6 per bushel,
how much wheat will Patricia produce?
b. If the price of a bushel of wheat falls to $4 per
Bushel, how much wheat will Patricia produce?
c. What are the two points on Patricia’s supply curve?
d. What is the lowest price for which Patricia will produce
Wheat rather than shut down?
Answers to Practice Problem:

1a. When the price of a bushel of wheat is $6 per bushel,

Patricia’s marginal revenue curve is shown in the figure as MR1.
To maximize her profit, Patricia produces 200 bushels of wheat
the quantity of which marginal revenue equals marginal cost

1b. If the price of wheat falls to $3 per bushel, Patricia’s marginal

Revenue curve is shown in the figure MR2. She creases the
Quantity of wheat she produces to 150 bushels per week
because that is the quantity at which marginal revenue equals
marginal cost.

1c. One point on Patricia’s supply curve is a price of $6 and

200 bushels. Another point is a price of $3 and a quantity of
150 bushels.

4
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

1d. The lowest price for which Patricia produces rather than shut down is the price equal her minimum
average variable cost. The figure shows that this price is equal to $2 per bushel.

Question 2. Suppose that when the price of a bushel of wheat is $6, Patricia produces a quantity of
wheat such that her marginal revenue is greater than marginal cost. Explain why she is not maximizing
profit.
Answer: If marginal revenue exceeds marginal cost, then the extra revenue from selling one more
bushel of wheat exceeds the extra cost incurred to produce it. So if Patricia produces one more bushel
of wheat, the marginal revenue that she receives from selling that bushel is greater than the cost to
produce that bushel and this bushel increases her profit. To maximize profit, Patricia must increase her
output until she reaches the point where the marginal revenue equals the marginal cost.

2) Activity 5: Check for Understanding (15min)

Short answer and numeric questions.

1. What are the conditions that define perfect competitions?
2. What is a “price taker”? Why are perfectly competitive firms price takers?
3. What is the difference between a perfectly competitive firm’s demand curve and the market demand
curve?
4. Willy, a perfect competitive wheat farmers, can sell 999 bushels of wheat for $3 per bushel or 1,000
bushels for $3 per bushel. What is Willy’s marginal revenue and total revenue if he sells 1,000 bushel of
wheat?
5. Why are perfectly competitive firms unable to make an economic profit in the long run? Why won’t
they incur an economic loss in the long run?
6. Is perfect competition efficient?

5
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Complete the graph

1. In Figure 11.6, suppose that the price of the food

Is $20. Show the long-run equilibrium for a perfectly
Competitive firm that produces150 per week.

2. Figure 11.7 shows cost curves for two firms in an

Industry undergoing technological change. Firm 1 uses
the old technology and has an average total cost curve
ATC1 and marginal cost curve MC1. Firm 2 use the
new technology and has an average total cost curve
ATC2 and marginal cost curve MC2. Initially the price
of the product was $6.
a. At the price of $6, do firm 1 and firm 2 make an
economic profit, zero economic profit or incur
economic loss?
b. As for firms adopt the new technology, what
happens to market supply and price? Do firms 1 and 2
make an economic profit, zero economic profit, or
Incur an economic loss?
c. In the long run, what will be the new price? Will
firm 1make an economic profit, zero economic profit,
or incur an economic loss? Will firm 2 make an
economic profit, zero economic profit or incur economic
loss?

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5mins)

A. Work Tracker
Congratulations! You are done with our session! Let’s track your progress. Shade the session number
you just completed.

B. Think about your Learning

1. Do you fully understand our topic today? What are your strategies in order to understand the topic?
_________________________________________________________________________________
_________________________________________________________________________________

2. What is your question about perfect/pure competition?

_________________________________________________________________________________
_________________________________________________________________________________
6
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #22

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Key to Corrections

Skill Building Activities

Total Price Total Marginal Average Total Cost Marginal Profit (TR –
Product Revenue (P Revenue Revenue Cost * TC) *
(Qty.) x Q) * (TR/Q) *
0 50 0 - - 120 - -120
1 50 50 50 50 150 30 -100
2 50 100 50 50 175 25 -75
3 50 150 50 50 193 18 -43
4 50 200 50 50 218 25 -18
5 50 250 50 50 248 30 2
6 50 300 50 50 282 34 18
7 50 350 50 50 322 40 28
8 50 400 50 50 372 50 28
9 50 450 50 50 427 55 23
10 50 500 50 50 485 58 15

1. 8 units. This is where Marginal Revenue = Marginal Cost

2. The maximum profit is 28

3 Price, average revenue and marginal revenue are all equal to 50.

4. A seller may adjust the prices of his products but as he continues to decrease the prices in order to
attract customers, this will eventually result to a loss.

Submit your activity sheets before the end of the session!

7
This document and the information thereon is the property of PHINMA Education