Price determination

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  • 1. PRICE DETERMINATIONPRICE DETERMINATIONUNDERUNDERPERFECT COMPETITIONPERFECT COMPETITION
  • 2. PERFECT COMPETITIONPERFECT COMPETITIONPerfect Competition is that situation of thePerfect Competition is that situation of themarket wherein there are large number ofmarket wherein there are large number ofBuyers and sellers of a homogeneous productBuyers and sellers of a homogeneous productand the price of such a product is determinedand the price of such a product is determinedby the market forces i.e ,the industry. All firmsby the market forces i.e ,the industry. All firmssell the product at this price. In other words ,sell the product at this price. In other words ,there prevails only one price of a product inthere prevails only one price of a product inthe marketthe market
  • 3. ASSUMPTIONSASSUMPTIONS Many buyers/Many SellersMany buyers/Many Sellers – Many consumers with– Many consumers withthe willingness and ability to buy the product at a certainthe willingness and ability to buy the product at a certainprice, Many producers with theprice, Many producers with the willingnesswillingness and ability toand ability tosupply the product at a certain price.supply the product at a certain price. Homogeneous ProductsHomogeneous Products – The products of the– The products of thedifferent firms are EXACTLY the same, e.g. fruit.different firms are EXACTLY the same, e.g. fruit. Low-Entry/Exit BarriersLow-Entry/Exit Barriers – It is relatively easy to enter– It is relatively easy to enteror exit as a business in a perfectly competitive market.or exit as a business in a perfectly competitive market. Perfect InformationPerfect Information - for both consumers and- for both consumers andproducersproducers Firms Aim to Maximise ProfitsFirms Aim to Maximise Profits - Firms aim to sell- Firms aim to sellwhere marginal costs meet marginal revenue, wherewhere marginal costs meet marginal revenue, wherethey generate the most profit.they generate the most profit.
  • 4. PRICE UNDER PERFECTPRICE UNDER PERFECTCOMPETITIONCOMPETITIONSUPPLSUPPLY OFY OFGOOD-GOOD-XXPRICEPRICEPERPERUNITUNITDEMADEMANDNDFORFORGOOD-GOOD-XX5050 55 10104040 44 20203030 33 30302020 22 40401010 11 5050Equilibrium price is determined at that point at which aggregate demand ofcommodity is equal to aggregate supply.DDSSEPQoxY IndustrysurplusShortageQuantityPriceEquilibriumPrice
  • 5. p1pp2d2dd1d1dd2e2ee1q2qq1o xyQuantityPricep1pp2p2q1q q1dds1ss2yxos1ss2ee1e2QuantityPriceEffect of change in Demand on Price Effect of Change in Supply on PriceD P S P
  • 6. Time ElementTime ElementVery ShortPeriodShort Period Long Period Very LongPeriodMarketPriceSub NormalPriceNormalPriceTradeCycle
  • 7. DETERMINATION OF MARKETDETERMINATION OF MARKETPRICE OR VERY SHORT PERIODPRICE OR VERY SHORT PERIODEQUALIBRIUMEQUALIBRIUM MARKET PRICE: Price of commodity whichMARKET PRICE: Price of commodity whichprevails in a market at a particular time.prevails in a market at a particular time. There are two types of Goods in the marketThere are two types of Goods in the marketas:-as:- Perishable GoodsPerishable Goods Durable GoodsDurable Goods
  • 8. Perishable Goods Durable GoodsPerishable Goods Durable Goodso xyssd2dd1d2dd1p2pp1e1ee2Quantityyo xq2 q q1p2pp1e2ee1Sddd2d2d1QuantityPRICEHere supply remain fixed Here supply increased uptocertain limit then becomevertical.d1s
  • 9. Short Period Long PeriodShort Period Long Periodssd1d1ddd2d2e2ee1yxo q2 q q1Quantityp2pp1yo xp1pp2N Q M Q1QuantityQ2EDDSSPrice PriceSupply can be increased upto itsexistingProduction capacity. Firm is continueSS D PS D P