CHAPTER 10 - PERFECT COMPETITION
In previous chapters, we have examined managerial decisions
the firm without regard to
the firm's external environment or "market structure." For the next 5 chapters, we look at the market
structure (industry) in which the firm competes. This area of economics is sometimes called "Industrial
Four possible markets: Perfect Competition (price-takers), Monopolistic Competition (price-
searchers), Oligopoly (a few firms dominate) and Monopoly (single seller), which vary according to:
a. Number of firms in the industry
b. Barriers to entry (exit) for new firms
c. Degree to which firms can control price
Government regulation of industry is determined partly by market structure. Regulation is supposed to
guarantee maximum competition to protect consumers against anti-competitive practices like: restraint
of trade, collusion, price-fixing, attempts to limit/eliminate competition, attempts to monopolize an
industry, etc. For example: Sherman Antitrust Act, mergers have to be approved by FTC, government
regulation of "natural monopolies" like utilities, cable TV, etc.
We start with Perfect Competition (PC), sometimes considered an ideal model of "friction-free
capitalism." See Table 10.1 on p. 398, Perfect Competition:
Many firms in the industry and no
barriers to entry (exit).
Extreme opposite of PC is Monopoly: 1 firm and high barriers to entry.
Sound managerial decisions depend on thorough knowledge of market forces of Supply and Demand,
because most firms are buying inputs in competitive markets and selling its output in competitive
GM buys materials (steel, rubber, parts, etc.), labor, capital equipment in
competitive markets, borrows money (bonds, bank loans) in competitive credit markets, raises equity
capital in competitive capital markets, and sells its output in competitive retail markets for new
See graph p. 400, Figure 10.1, for market conditions for shoes in a local market.
= 13 - .2P
= -2 + .4P
We can set Q
and solve for P*: 13 - .2P = -2 + .4P
P* = $25 per pair of shoes
Q* = 13 - .2 (25) = 8 thousand shoes
$25 is the "market clearing" price, i.e. the price that clears the market. Market clearing = equilibrium =
) = no shortages = no surpluses.
What if the price is P = $20 instead of P = $25?
ECN 469: Managerial Economics
Professor Mark J. Perry