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Can Tho UniversitySchool of economics- - -    - - -Essay on Microeconomic KT103HPERFECTLY COMPETITIVE MARKETFull Name: Ton Anh KietStudent code: BClass: 20W4F3-C6 :School year 2021-2002-Semeter 1Can Tho: 2021CHAPTER I INTRODUCTIONIn the production of goods, profit is the highest economic goal, a ...

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Can Tho University

School of economics - - -   - - -

Essay on Microeconomic KT103H

PERFECTLY COMPETITIVE MARKET

Full Name: Ton Anh Kiet Student code: B2006299 Class: 20W4F3-C6 : School year 2021-2002-Semeter 1 Can Tho: 2021

CHAPTER I INTRODUCTION In the production of goods, profit is the highest economic goal, a cond ion for the existence and development of enterprises. To provide goods and services to the market, businesses must invest capital in the production and business process They want the cost of inputs to be minimal and sell goods at the highest price ie all Every business wants to maximize profits. In a perfectly competitive market, the prices of goods and services in the market are determined by the supply and demand of the entire market. Each seller itself cannot control the price of the item they supply in the market. Thus, under perfect competition each seller is a price taker. Unable to self-regulate market prices. What should a perfectly competitive firm do to maximize profits? How should they adjust the amount of goods supplied to the market to ensure maximum profit for the business when the market price changes in both the short and long term? The reason that the author chooses a perfectly competitive market is given to readers because our country is a developing country, most of the businesses are participating in this market, the author wants to provide some knowledge for you to read. understand more about it. The author's target audience is economics students or those who are interested in economics and you want, have been, and are participating in starting a business. In the scope of this discussion, we would like to present the scientific basis for enterprises to make effective supply decisions in accordance with price fluctuations in the market in the short-term and long-term production periods. when they do business in a perfectly competitive market.

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CHAPTER II THEORETICAL BASIS II.1. THE BASIC CONCEPTS An enterprise is a unit that trades in goods and services according to market and social demands in order to maximize profits and achieve the highest socioeconomic efficiency. A market is a mechanism in which buyers and sellers interact to determine the prices and output of goods or services. A perfectly competitive market is one in which there are so many sellers and buyers that no one seller or buyer can influence the price of the market. Demand reflects the quantity of a good or service that buyers are willing and able to buy at different prices in a given period, assuming all other things constant. Quantity demanded is the specific quantity of a good or service that buyers are willing and able to buy at a given price in a given period (assuming other things remain constant) The demand function is an algebraic expression that represents the relationship between the quantity demanded of an item and its price Supply reflects the quantity of a good or service that sellers are willing and able to sell at different prices in a given period (assuming all other things constant) Quantity supplied is the specific amount of a good or service that sellers are willing and able to sell at a given price during a given period (assuming other things remain constant) The supply function is an algebraic expression that represents the relationship between the supply of an item and its price. Supply and demand equilibrium is the state of the market where the quantity supplied equals the quantity demanded (a state in which there is no pressure to cause price or output to change). The short run is the period in which at least one factor of production cannot be changed, also known as a fixed factor. The long run is the time period in which all inputs are subject to change.

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The average product of an input is the average number of products produced by a unit of input in a given time. The marginal product of an input is the change in total output when the input changes by one unit. Production cost is the total cost to serve the production and business process that an enterprise has to spend and incur in a certain period of time. Economic cost is the total cost of using economic resources in the production and business process in a certain period of time. Short-term production costs are the costs that businesses have to incur when conducting production and business in the short term. Total long-run costs include all costs incurred by a business to produce and sell goods or services if the inputs of the production process can be adjusted. Long-run average cost is the average cost per unit produced in the long run. The long run marginal cost is the change in total cost resulting from producing one more unit of output in the long run. Profit is the difference between total revenue and total cost of production. Marginal revenue is the change in total revenue when one more unit is sold. II.2. CHARACTERISTICS OF A PERFECTLY COMPETITIVE MARKET - There are infinitely many independent buyers and sellers. + A perfectly competitive market requires a large number of buyers and sellers, each of whom acts independently of all the others. + The number of sellers and buyers is said to be multiple, when the normal transactions of one buyer or seller have no effect on the price at which the transactions are made. - All units of exchange are considered to be the same. This feature is practically conspicuous in the market. For example, the coal market is of the same quality, or the gasoline market each unit is a copy of any other. Therefore, buyers never have to care who they buy those units from. - All buyers and sellers have full knowledge of the information related to the exchange. 3

A perfectly competitive market requires that all buyers and sellers have contact with all potential exchangers, knowing all the features of the items of exchange; know all the prices demanded by the seller and the price paid by the buyer. People are closely related to each other and the communication between them is continuous. - There is nothing to prevent entry and exit from the market. The market is perfectly competitive at any given time, each person must be free to be a buyer or seller, free to enter the market, and be exchanged at the same price as prevailing exchangers. Likewise, it requires that there be no obstacle preventing someone from being a buyer or a seller in the market and therefore withdrawing from the market. II.3. PERFECTLY COMPETITIVE FIRM 3.1 Basic characteristics of perfect competition behavior A perfectly competitive firm can sell all of its output at the prevailing market price. firms are small relative to the same market, so the firm has no appreciable effect on total output or market prices. Therefore, a perfectly competitive firm has absolutely no market power, that is, the inability to control the market price for the product it sells, who must accept the market price. Individually competitive firms can sell off their output at prevailing market prices. This is characteristic of firms' lack of market power. All competing firms have no independent influence on market prices. A perfectly competitive firm's output is too small for the market capacity, so its output decisions have no appreciable effect on price. A perfectly competitive firm faces a horizontal demand curve for its output. DIAGRAM

Figure 5.1

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3.2 Output of a perfectly competitive firm It is noted that if the market has many sellers and many buyers, but there are a few sellers and a few buyers with the majority of output, the increase or decrease in its output affects the whole market. market cannot be called a perfectly competitive market.

Figure 5.2 A perfectly competitive firm will determine output at the point where the difference between revenue and costs is greatest. In the figure above, since selling price is constant with output, the revenue curve is a straight line. In practice, often selling prices are fixed over time periods such as weeks, months, and years, so in 5

the short run, the sales revenue curve of every company is a linear straight line. The cost curve also follows the law of businesses in general that is the curve has an increasing slope. At the origin, when no unit has been produced (q=0), there is no revenue but fixed costs (FC). At A is when revenue equals costs, called breakeven point. At B is when the difference between revenue and cost is the largest, this is the point to stop. At point B, marginal revenue MR equals marginal cost MC; where MR=P -> at this point MC=P. That is, at the point where marginal cost equals selling price, the firm will maximize profit. 3.3 The short-run supply curve of a perfectly competitive firm The firm will use the marginal condition (MR = MC) to find the level of output that maximizes profit. In the short run, firms will choose the level of output at which MR = SMC, where SMC is the short-run marginal cost. A special feature of perfect competition is the relationship between marginal revenue and selling price. Since the demand curve is horizontal, for every additional unit a firm sells, it will receive an additional amount equal to the price of the product. In a perfectly competitive market, marginal revenue equals the price of the product: MR = P (*) And to maximize profits, the firm will choose the output level at which price equals the marginal cost of output: P = SMC(*) Figure 5.3 depicts a firm's supply decision in the short run. Assume the firm has a marginal cost curve SMC. As we all know, this SMC curve will pass through the minimum points of the enterprise's SAC and SAVC curves. They are points A and C, respectively.

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Figure 5.3. Deciding to provide the application within the short term of the business Suppose the firm is facing a horizontal demand curve at price P4 in Figure 5.3, and the firm will choose the output Q4 corresponding to point D because at that point price equals marginal cost. When the product price is at P3 or higher, that is, the price is greater than the minimum average cost, the firm will choose an output level corresponding to a certain point on the SMC curve from point C upwards, then price is greater than average cost. For example, if the price is P4, the firm produces at output Q4. Then the average cost is SAC4. The firm makes a profit in the short run because then price (P4) is higher than average cost (SAC4). Similarly, corresponding to a certain price, the enterprise will rely on the SMC curve to choose the optimal output level. When the price is at P3, the firm will choose the output level corresponding to the point C on the SMC curve, which is also the minimum point of the SAC curve. Now that the price is equal to the minimum average cost, the firm will produce Q3 output and then the firm will break even. Therefore, we also call the price P3 the breakeven price. In between points A and C, the business incurs a loss because the price is below average cost. However, if the price is between P1 and P2, the enterprise can partially cover the fixed costs, so the business continues to produce. For example, when the price is P2, the firm will produce the output corresponding to point B on the SMC of Q2. Why is the business losing money but still not withdrawing from the industry? A business can 7

operate and incur losses in the hope that in the future the price of the product will increase or it can reduce the cost of production so that the business can earn a profit in the future. In fact, businesses can choose one of two options: continue production or temporarily close. Enterprises will choose which option is more profitable. If not producing, the business will suffer a loss of fixed costs. If the business continues to produce, only a part of its fixed costs will be lost. At that time, the price is lower than average total cost (P < SAC) but still higher than average variable cost (P > SAVC), so the enterprise can cover variable costs (VC) and part of the cost. excess compared to SAVC can be used to partially offset fixed costs. The firm will produce at any price higher than P1 (which is also the minimum average variable cost) because at those prices the firm will cover shortrun variable costs and which can cover fixed costs. The business will stop working when the price is lower than P1 because then if it continues to produce, the business will not even cover enough variable costs and will suffer a heavier loss than if it stopped production. The price P1 is called the closing price or the starting price of production. At different prices, the firm will choose the output level corresponding to the points on the SMC curve at that price. In other words, the points on the SMC curve indicate the amount of output that the firm will supply at certain prices. Therefore, we can call the SMC curve the firm's short-run supply curve. However, the firm only starts production when the price is from minimum average variable cost upwards, so the supply curve exists only above point A, where the SMC curve crosses the lowest point on the SAVC curve. Let us consider an example of a shortrun supply decision of a firm operating in a perfectly competitive market to better understand the firm's decision-making process. 3.4 The long-term supply of business In this section, we study the concept of long term. Long-term is a time long enough for enterprises operating in the industry to change their output, production scale or leave the industry; at the same time, new firms can enter the industry. Figure 5.4 shows how the firm's supply decisions in the long run are made. At one point in the short run, the firm's demand curve is horizontal at the price P0. With the SAC and SMC lines as shown in Figure 5.4, the firm earns a positive profit. That is the area of rectangle ABCD. The firm produces output q1, sells it at P0, and has an average cost corresponding to point B on the SAC curve. If the firm believes that the market price will be maintained at P0, it will want to increase the size of its factory to earn more profit. At this point, the firm has the long-run average and marginal cost curves LAC and LMC. We also note that the LAC curve will touch the 8

minimum of the SAC and the LMC will pass through the minimum of the LAC. The firm will choose an output level q3 corresponding to point E on the LMC curve. So, when the factory expansion is completed, the profit of the business will be the DEFG area. We also see that the higher the price, the higher the profit of the firm, and vice versa, if the price falls. The firm will close and leave the industry if the price is below P1, which corresponds to the minimum long-run average cost (note that in the long run all costs are variable costs). The same principles as in the short run can be applied to establish the long run supply curve of a firm in perfect competition. At large prices at minimum average cost (prices greater than P1), the firm makes a profit and will produce. In the long run firms leave the industry when prices do not cover the long-run average cost LAC. Those are the prices lower than the price P1. Therefore, the firm's long-run supply curve is the part of the LMC curve to the right of point H corresponding to the price P1. At price P1, the firm produces q2. The firm then just covers the economic costs, or the firm earns a profit that is normally equal to the opportunity cost of capital and time for the business owner.

Figure 5.4. Long-term supply decisions of enterprises

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3.5 Industry enterprises, exports and long-term equality of perfect competitive industry Figure 5.4 shows that when the price is P0, the firm will increase output and cause profits to increase as the firm expands. The firm's positive economic profit means that this is an unusually high profit (super profit). High profits will stimulate investors to shift resources from other industries to this industry, ie, there will be new businesses entering the industry. Due to the entry of the industry, the output of the industry increases, causing the industry supply curve to shift to the right. The equilibrium price in the market will decrease. On the other hand, when there is entry into the industry, the number of firms in the industry increases, increasing the demand for inputs. That increases the prices of inputs and thus makes production more expensive. Taken together, we see that the entry of new firms reduces the profitability of firms in the industry. Economic profits of enterprises will gradually decrease to zero, then there will be no incentive for new businesses to enter the industry anymore. Figure 5.5 illustrates this

Figure 5.5 Long-run competitive equilibrium Figure 5.5a shows the firm's supply decision in the long run. When the price is at P0, the firm produces q0 and makes a profit. This profit spurred other firms to enter the industry and caused the long-run point in the market to move from point E to E' in Figure 5.5b. The price will fall to P2, which is equal to the minimum average cost of the firm. Note that this price P2 will be higher than the price P1 in Figure 5.4 because of increased production costs due to the entry of the industry as shown 10

above. The firm will produce output q 1 to maximize profit. However, at q1 output, firms only break even, so there is no incentive for new firms to enter the industry. We say the industry is in equilibrium in the long run. At this point, the economic profit of businesses is zero. Zero economic profit does not mean that competing firms are inefficient, but only that it is a competitive industry. The price P2 corresponding to the lowest point on the LAC is called the entry or exit price of the industry. Thus, long-run competitive equilibrium occurs when the following three conditions are satisfied. First, all firms in the industry are producing at a profitmaximizing output level. Second, no firm has an incentive to enter or exit an industry because firms in the industry earn zero economic profit. Third, the price of the product is at the level at which industry supply equals consumer demand. In practice, firms in the industry have different cost curves. Some firms have patents, inventions, or ideas that reduce production costs or have better improved production technology, so they may have a lower cost curve than other firms in the industry. This means that in the long run equilibrium these firms can earn higher profits than other firms. As long as other businesses don't have patents, inventions or ideas to lower costs, etc. they have no incentive to enter the industry. Patents bring profits to businesses, other businesses will be willing to pay to get this invention or buy the whole business to get that invention or invention. Therefore, the value of the patent will increase, which is the opportunity cost of the business the business can sell the copyright to another enterprise without using it. But if all firms are equally efficient, and when opportunity costs are taken into account, the firm's economic profit falls to zero. 3.6 Industry’ supply curve A competitive industry consists of many businesses. In the short run, there are two fixed factors: a fixed number of inputs to the firm and the number of firms in the industry. In the long run, each firm can change all factors of production and at the same time the number of firms also changes due to the import or export of the industry. 3.6.1 The industry's short-run supply curve Just as the individual demand curves are aggregated into the market demand curve, the industry supply curve is also constructed by adding up all the supply curves of the firms in the industry. Figure 5.6 depicts how the industry's short-run supply curve is aggregated. At each price, we add up the quantity supplied by each firm to get the quantity supplied by the industry as a whole at that price. In the short run, the number of businesses is fixed. We assume a competitive industry with only two 11

firms A and B. Each firm has a supply curve that is the fraction of the SMC curve above the closing price. Firm A has a lower closing price than Firm B, P 1 compared to P2, possibly because Firm A has a more favorable geographica...