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Me Perfect Competition


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Me Perfect Competition

  2. 2. Perfect Competition <ul><li>Perfect competition is that market situation in which no seller or buyer is in a position to affect the price of the commodity in question by sales or purchase behaviour. Under conditions of perfect competition every buyer faced a perfectly elastic supply situation and every seller faces a perfectly elastic demand situation. </li></ul>
  3. 3. Features or assumptions of Perfect Competition <ul><li>1. Large number of undifferentiated buyers and sellers, who are not very large in size . Quantity bought does not affect the total demand and price. Each seller will accept the market price as it is and each buyer will regard the price as determined by forces beyond his control. Thus the firm in perfect competition is essentially a ‘ price taker’,and not a price maker. </li></ul><ul><li>2. Homogeneous Product . Each competitor offers exactly a similar thing. There is nothing to distinguish one from the other and so no one thinks of substitution because of features. </li></ul><ul><li>3. Perfect Knowledge . Buyers and sellers are well informed, well organized and trading is continuous. </li></ul>
  4. 4. <ul><li>4. No restrictions. There are many competitors,(buyers and sellers), each acting independently. There is no restraint upon the independence of their actions by custom, contract, collusion, fear of reprisal by competition, or by Govt. control. </li></ul><ul><li>5. The market price is flexible over a period of time, dictated by forces of demand and supply . </li></ul><ul><li>6. Profit Maximisation . The goal of all the firms if profit maximisation. No other goals – revenue maximisation, balanced rate of growth maximisation, or satisficing are important . MR=MC. </li></ul><ul><li>7. Perfect Mobility. All factors of production are free to move. No organised trade unions. Workers can move freely between jobs. </li></ul><ul><li>8. Free entry and exit of firms. Firms are free to enter or exit from the industry. </li></ul>
  5. 5. Determination of price under perfect competition <ul><li>Prices under perfect </li></ul><ul><li>competition are determined </li></ul><ul><li>by the forces of demand and </li></ul><ul><li>supply. Prices will be fixed </li></ul><ul><li>at a point where the supply </li></ul><ul><li>and demand are at an equilibrium. </li></ul>price output D S S D
  6. 6. <ul><li>1. If demand rises , price goes up and vice versa. </li></ul><ul><li>2. If supply rises , price goes down and vice versa. </li></ul><ul><li>3. If both demand and supply increase , sales are bound to increase but the price may or may not rise. </li></ul><ul><li>3a. If the supply curve is elastic, price will rise or fall less. If the supply curve is inelastic, the price will rise or fall more. </li></ul><ul><li>3b. Of the demand curve is elastic, price will rise or fall less. If the demand curve is inelastic, the price will rise or fall more. </li></ul><ul><li>4. In perfect competition, the average revenue and marginal revenue curves of all the firms is the same, a line parallel to the X (output) axis. </li></ul>
  7. 7. Total Revenue and Total Cost curves in Perfect competition <ul><li>Firm Making profits Firm Making Losses </li></ul>TR TR Total Revenue & Total Cost Total Revenue & Total Cost output output TC TC
  8. 8. Conclusion <ul><li>Short run profit maximisation: </li></ul><ul><li>If MC < MR, it will be advantageous to expand output till MC = MR. </li></ul><ul><li>If MC > MR, output should be reduced </li></ul><ul><li>up to the level MC = MR. </li></ul><ul><li>3. Short run profits are maximised when </li></ul><ul><li>MC = MR. </li></ul>
  9. 9. <ul><li>The firm is at equilibrium when, </li></ul><ul><li>A) Marginal cost (MC) is equal to Marginal Revenue (MR). </li></ul><ul><li>B) The marginal cost curve cuts the marginal revenue curve from below. </li></ul><ul><li>All firms do not earn profits in short-run perfect competition. </li></ul><ul><li>The firms make losses because, </li></ul><ul><ul><ul><li>The firms average total cost is equal to price. </li></ul></ul></ul><ul><ul><ul><li>The firms whose average total cost is greater than price, but their average variable cost is equal to or is less than price. </li></ul></ul></ul><ul><ul><ul><li>The firms whose average variable cost is greater than price. </li></ul></ul></ul>