The document discusses price determination in a perfectly competitive market, characterized by many buyers and sellers trading identical products with free entry and exit. It explains equilibrium between demand and supply, how prices change due to shifts in these curves, and the different time elements affecting prices, including market, short, long-run, and secular periods. Additionally, it outlines factors influencing price determination, such as normal price conditions and the laws of returns.

1. Price Determination Under
Perfect Competition
JITHIN K THOMAS
Berchmans Institute of Management Studies

2. Perfect Competitive Market
• Perfectly Competitive Market is a situation
where large number of buyers and sellers are
engaged in the purchase and sale of
identically similar commodities, who are in
close contact with one another and who sell
freely among themselves.

3. Perfect Competitive Market
• Features
– Free and perfect competition
– Large number of sellers
– Large number of buyers
– Homogenous Product
– Free entry and exit
– Perfect Knowledge
– Perfect mobility of factors of production
– Lack of transport cost
– No selling cost

4. Pure Competition
• Large number of sellers
• Large number of buyers
• Homogenous Product
• Free entry and exit
• Independent decision making

5. Price Determination Under Perfect
Competition
• Total Demand
– The amount which people are willing to buy at
various prices.
• Total Supply
– The amount which the producers are willing to
put on the market at various prices.

6. Equilibrium between Demand &
Supply Price

7. Equilibrium between Demand &
Supply Price

8. Change in Equilibrium
• The Equilibrium price and quantity changes
due to change in demand curve or supply
curve.

9. Effect of Change in Demand

10. Effect of Change in Supply

11. Effect of Change in Both Demand &
Supply

12. Time Element
• Market Period
– Refers to type of competitive market in which the
commodities are perishable and supply of such
commodities cannot be changed at all.
• Short Period
– Similar to Market period except that the
commodities in question are not perishable but
durable through of a short duration than capital.

13. Time Element
• Long Run
– All factors of production can be changed
• Secular Period
– Very long period
– All underlying economic factors like size of
population, general condition of capital supply
etc. can change.

14. Price Determination Under Market
Period
• Perishable goods
• Durable goods

15. Reserve price
• Price in the future
• Liquidity Preference
• Future cost of production
• Storage expenses
• Durability of commodity
• Future demand

16. Price Determination Under Market
Period
Supply can be changed by changing variable factors.
Short period price is determined by the forces of
supply and demand.

17. Price Determination Long Period
• Normal Price – price which tends to prevail in
a market when full time is given to the forces
of demand and supply to adjust themselves.

18. Normal Price and Laws of Return
• Normal price and Law of Increasing return
– Economies of scale
– AC & MC falls
• Normal price and Law of Constant return
– What ever the out put AC & MC remains constant
• Normal price and Law of Decreasing return
– Diseconomies of Scale
– AC & MC rises