9781118041581

Competitive Equilibrium 289

CHECK

STATION 1

In 1999, the respective worldwide demand and supply curves for copper were: QD 15 

10P and QS 3 14P, where Q is measured in millions of metric tons per year. Find

the competitive price and quantity. Suppose that in 2000 demand is expected to fall by

20 percent, so QD(.8)(15 10P)  12 8P. How much are world copper prices

expected to fall?

COMPETITIVE EQUILIBRIUM

Perfect competition is commonly characterized by four conditions.

1.A large number of firms supply a good or servicefor a market consisting of

a large number of consumers.

2.There are no barriers with respect to new firms entering the market. As a

result, the typical competitive firm will earn a zero economic profit.

3.All firms produce and sell identical standardized products. Therefore, firms

compete only with respect to price. In addition, all consumers have

perfect information about competing prices. Thus, all goods must sell

at a single market price.

4.Firms and consumers are price takers. Each firm sells a small share of total

industry output, and, therefore, its actions have no impact on price.

Each firm takes the price as given—indeed, determined by supply and

demand. Similarly, each consumer is a price taker, having no

influence on the market price.

It is important to remember that these conditions characterize an ideal

model of perfect competition. Some competitive markets in the real world

meet the letter of all four conditions. Many other real-world markets are effec-

tively perfectly competitive because they approximate these conditions. At pres-

ent, we will use the ideal model to make precise price and output predictions

for perfectly competitive markets. Later in this and the following chapters, we

will compare the model to real-world markets.

In exploring the model of perfect competition, we first focus on the indi-

vidual decision problem the typical firm faces. Then we show how firm-level

decisions influence total industry output and price.

Decisions of the Competitive Firm

The key feature of the perfectly competitive firm is that it is a price taker; that

is, it has no influence on market price. Two key conditions are necessary for

price taking. First, the competitive market is composed of a large number of

sellers (and buyers), each of which is small relative to the total market. Second,

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