- [Instructor] In our study
of the different types
of markets, we are now going
to dive a little bit deeper
and understand perfect competition.
Now this notion of something
being perfectly competitive,
you might have a general
idea of what it means.
You might feel like it's very competitive,
that there's a lot of
people there maybe competing
for your business, or maybe
there's a lotta buyers,
and there are a lotta sellers.
And that is generally
true, but we're trying
to be economists here, so
we wanna be very precise
with our language.
So when economists talk
about perfect competition,
they're talking about this
somewhat very abstract state
where you have many buyers and sellers,
many sellers and buyers.
Now that doesn't seem too abstract so far.
We can imagine a lot of markets
that have many sellers and buyers.
Now another thing that
defines perfect competition
from an economics point of
view is that they're selling
identical, identical products or services,
products, products or services.
Now this one seems a little bit harder
because even when you can imagine
a fairly competitive
market, does everyone sell
exactly the same thing?
Well you imagine certain
markets, maybe the market
for water or maybe the market
for some type of energy
or maybe the market for produce,
gets pretty close to identical
products or services.
So so far it doesn't seem
like that abstract of a thing.
Now another aspect of perfect competition
is that every agent, so
that would be the buyers,
the sellers, the producers, the consumers,
they have perfect information,
perfect information.
Now what does perfect information mean?
It means that every
participant in the market,
the buyers and the sellers,
they all know exactly
what is happening in the market.
So what goods or services
are selling for what price
and who is selling to whom.
So once again, this gets
a little bit more abstract
because to get truly perfect information,
you can't, not everyone in
a market will always know
everything that's going on.
So once again, this is a
little bit of an abstract idea
that economists have introduced
to be a little bit more precise.
And the last aspect we're
going to talk about,
and this is also something
that is a bit idealized
that doesn't truly
exist in the real world,
things close to this
exist in the real world,
is that there is no barriers,
barriers to entry or exit.
Now we already mentioned some markets,
say the market for agriculture.
That doesn't quite have no
barriers to entry or exit.
You would somehow have to
get land, you would have
to get seeds, you would
have to get fertilizer,
you would have to hire
people to put the seeds in
and to harvest the crops.
And so almost any industry,
any market you imagine,
will have some barriers, but
this is an idealized notion
that economists like to think about,
and of course in the real world
things might approach this
or be closer to perfect
competition than say other markets.
But when you're in this
situation, let's analyze
what will be happening.
So we can look at the market
as a whole for whatever
this product and service is.
So let me draw price versus quantity here
for the market as a whole.
So this is price, and this is quantity.
And this is the market right over here.
And so, we've seen this multiple times
in our economics journey.
That you have an
upward-sloping supply curve,
and once again this is
for the entire market.
Let me do this is in a different color.
So you have an upward-sloping
supply curve like that.
And you would have a downward-sloping
demand curve like that.
And we know what the
equilibrium price and quantity
would be for the market.
So this right over here
would be the equilibrium,
equilibrium quantity for the market,
and this right over here
would be the equilibrium price
for the market.
Now how would this affect
the decisions for the firm
in perfect competition?
Well let's draw, let's
draw a similar analysis,
but now at the firm level.
So on this axis, you could
view this for the firm,
and so this is going to be
the firm right over here,
one of the participants in
the perfect competition,
one of the producers, one of the sellers.
So on this axis, you
could view this as price.
You could also view this
as marginal revenue.
And you could also view
this as marginal cost
because we're going to plot
the different curves here.
And then on the horizontal axis,
we're going to have quantity
again, but this is once again
the quantity that the firm produces.
Now, first of all, we could
think about the marginal cost
for the firm, and we've
seen this multiple times.
That the marginal cost for the firm,
it might look something like this.
It over time might trend
upwards something like this
where at some point every
incremental unit is costing
more and more to produce.
Maybe it's harder to get the resources,
harder to get the labor,
whatever you wanna say.
So that's the marginal cost curve,
fairly typical for a firm.
And then we could think about
their average total cost.
And so the average total
cost curve might look
something like this.
So draw something like this.
So our average total cost,
we've seen this multiple times.
Now what is going to be the
marginal revenue for this firm
that is operating in perfect competition?
Well when it's operating
in perfect competition,
it just has to be a price taker.
So every unit it sells
is just going to get
the market price for that unit.
So in perfect competition,
the firm, every participant
that is really identical in a lotta ways,
they're just gonna take that price.
Think about it, they won't
be able to charge any more
for their product or service
than the market price
because their product
or service is identical
to everyone else's, and everyone knows it
because of perfect information,
and they would have
no motivation to charge less either.
They're just passive.
You could view it that way
when it comes to price.
So if we just take this
market price across
just like that.
This right over here, this
price, is going to define
the marginal revenue curve for that firm.
So let me make this a bold
curve right over here.
This is going to be the
marginal revenue for the firm.
For every unit it sells on the margin,
that's how much more
revenue it's going to get.
Now you could also view
this as the demand curve
for the firm's product.
You could also view this
as the average revenue
for the firm's product.
And let me make this clear,
this is for the firm,
demand for the firm, which
is equal to the price
that the firm actually gets.
So the big takeaway here
is in perfect competition,
which is this somewhat idealized state
that doesn't quite
exist in the real world,
certain markets can approach it,
the firms are passive price takers.
They have no say on what
the price is going to be,
and so it would be rational
for them to just produce
where their marginal cost intersects
with their marginal revenue.
Because anything more
than that, then for every
incremental unit, they're
going to be spending more money
than they get in terms of revenue.
And this passivity goes
a little bit against
some of our everyday notions
of fierce competition.
When we think about fierce competition,
we often think about many players trying
to constantly undercut each
other, and in future videos,
we'll talk about scenarios
where that might happen.
And you might think about
whether or not you would want
certain markets to have
perfect competition.
Because no barriers to
entry means that frankly
anybody could get into that industry.
So for example, you might
not want perfect competition
when it comes to someone
being say your doctor
because you want barriers to entry.
You want some level of training.
You want some level of
experience before someone
gets into that service.
