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We have perfect information (perfect usually means symmetric, meaning the buyer and seller have the same
information. In the used car market, for example, the seller knows more about the car than the buyer so information is
not perfect in the used car market.
There are no natural monopolies. A natural monopoly occurs when fixed costs dominate and variable costs are trivial.
There are no externalities. Externalities are external costs or benefits that affect some one or some group other than the
buyer/user or producer/seller of the product. That is external to the marketthe market representing only the decisions
of and interactions between buyers and sellers. Pollution and second-hand smoke are examples of negative
externalities. Education is an example of a product with external benefits.
Note the distinction between government determined or influenced outcomes and a pure market outcome. Even though the US
economy is characterized as a free-market economy, very few markets are completely free of government intervention.
How many markets can you identify for which there are no government influences?
Defining Perfect Competition.
Perfect competition is one of the four basic types of market structure as defined in the following table.
Perfect Competition
Monopolistic Competition
Oligopoly
(includes duopoly)
Monopoly
Many sellers
Many sellers
Few sellers
Homogenous Product
Differentiated Product
Differentiated Product
Unique Product
No barriers to entry
No barriers to entry
Barriers to entry
Substantial barriers
Economic Profits = 0
in the Long Run
Economic Profits = 0
in the Long Run
One seller
because:
MC = MR
firms are rational optimizers and they follow the profit max rule
MR = P
P = MU
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Derivation: From Social Surplus equation #1 (SS = CS + PS) to Social Surplus equation #2 (SS = TSB - TSC)
SS = CS + PS and
CS = TU-PQ,
SS = (TU-PQ) + (PQ-TC)
SS = TU - TC
And if assumptions hold: TU = TSB and TC = TSC
SS = TSB -TSC
PS=PQ-TC