Perfect competition

1. PERFECT COMPETITION
MANAGERIAL ECONOMICS

2. Perfect competition
 Perfect competitionis a model of the market based on the assumption that a large
number of firms produce identical goods consumedby a large number of buyers.
 Companies are price takers not price makers

3. Features of Perfect Competition
1. Large number of buyers and sellers
2. Homogeneous products
3. Freedom of entry and exit
4. No transportation cost or absence of transportation cost
5. Perfect knowledge about market conditions

4. Pure Competition
 Pure competitionis a market structure that involves different manufacturers providing
customers with similar products. A large number of homogenous goods, many sellers that
can easily enter the market, and customers who have full information about the
companies and their products create a perfect environment for this market model.

5. Price Line of Perfect Competition
 In perfect competitionthe price
line will be a straight line parallel to
OX axis

7. Equilibrium Price and Price Determination
Under Perfect Competition
Under perfect competition, price of a commodity is determinedby its demand and supply.
Price of a commodity is determined at the point at which its demand and supply are equal.
This price is known as equilibrium price. The quantity bought and sold (demanded and
supplied) at this price is known as equilibrium quantity.
The firm reaches its equilibrium position when the following two conditions are satisfied:
1. The firm reaches the equilibrium position when it produces that level of output at which
Marginal Cost (MC) is equal to Marginal Revenue (MR).
2. At the equilibrium level of output the MC curve must cut MR curve from below, i.e., MC
curve shouldhave positive slope.

9. Price determination in the short run period
 Under short period firm can increase production or supply by intensive use of existing plant
and equipment's and increase variablefactors
 Price determinedin the short period is calledshort run normal price
 Conditions:-
1. P=MC=MR
2. MC curve shouldcuts MR from below
3. Price shouldbe more than or equal to minimum point of AVC( Average Variable Cost )

11.  During long run there will be sufficient time to expand business
 Free entry and exit
 Due to the entry of new firms the price of production factors increases and thus cost
increases. The supply also increases. Hence the price comes down thus in the long run
super normal profit disappears.
 Similarly if during short period the firm’s have been incurring losses then in the long run , the
losing firm’s may leave the industry. This brings down the price of production and cost. The
supply also decreases. Hence the price increases.This loss disappears in the long run
 Conditions:-
1. P=MC=MR
2. MC curve shouldcut MR from below
3. Price shouldbe more than or equal to minimum point of LRAC( Long Run Average Cost )
Price determination in the long run period

13. THANK YOU