Economics Perfect Market Competition

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Perfect Market Competition, Features, Behaviour & Implications of Revenue under perfect competition, Difference between Perfect competition , Monopolistic competition and Monopoly

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Economics Perfect Market Competition

  1. 1. Perfect Market Competition  Under perfect market competition , a large number of firms compete against each other for selling their product. Therefore, the degree of competition under perfect competition is close to one, i.e.., the market is highly competitive.
  2. 2. Features of perfect market competition  A large number of sellers and buyers  Homogeneous product  Perfect mobility of factors of production  Free entry and exit of firms  Perfect knowledge  Absence of collusion or artificial restraints  No government intervention
  3. 3. Behaviour of Revenue under perfect competition  Total Revenue(TR) is the total amount of money received by the firm from the sale of its total output  TR = Price per unit x No. of units sold  Average Revenue (AR) It’s the revenue per unit of the product sold  AR= TR/No. of units sold  Marginal Revenue (MR) is the additional revenue earned by a firm by selling one more unit of the output  MR= change in total revenue / change in quantity sold
  4. 4. Behaviour of revenue under perfect competition Price (P) Output (Q) Total Revenue (TR) Average Revenue (AR) Marginal Revenue (MR) 10 0 10×0 = 0 0/0 = ------ ------------- 10 1 10×1 =10 10/1 = 10 10/1 = 10 10 2 10×2 = 20 20/2 = 10 10/1 = 10 10 3 10×3 =30 30 /3 = 10 10/1 = 10 10 4 10×4 =40 40 /4 =10 10/1 = 10 10 5 10×5 = 50 50 /5 = 10 10/1 = 10 10 6 10×6 = 60 60 /6 =10 10/1 = 10
  5. 5. Behaviour of TR & Q Behaviour of P and Q  Price is equal to AR (universally applicable)  Marginal revenue is equal to price but for perfect competition only. Implications of revenue under perfect competition TR Q (Output) P/AR/MR Q (Output) AR=MR
  6. 6. Difference between Perfect competition , Monopolistic competition and Monopoly Sr. # Reference Perfect competition Monopolistic competition Monopoly 1. No. of sellers and buyers Large Large One seller, but large no. of buyers 2. Product Homogeneous Product differentiation Homogeneous or Differentiated 3. Price Uniform Not uniform because of product differentiation Not uniform because of price discrimination 4. Entry of firms Free entry Not absolute freedom Not possible
  7. 7. Sr. # Reference Perfect competition Monopolistic competition Monopoly 5. Knowledge of market conditions Perfect knowledge Imperfect knowledge Imperfect knowledge 6. Mobility Perfect mobility Imperfect mobility Imperfect mobility 7. Firm’s demand curve Perfectly elastic Relatively more elastic Relatively less elastic 8. Slope of firm’s demand curve Horizontal straight line (AR=MR) Slopes downward with high elasticity (AR>MR) Slopes downward with low elasticity (AR>MR)
  8. 8. Sr. # Reference Perfect competition Monopolistic competition Monopoly 9. Selling costs Not required Very significant Not required 10. Degree of price control No control over price Partial control over price Full control over price 11. Level of profit in the long run AR = AC → Normal profits AR = AC → Normal profits AR > AC → Extra- normal profit

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