The document discusses the characteristics of perfect competition. Key points include: - Under perfect competition there are many small buyers and sellers of homogeneous products, with free entry and exit from the market. Firms are price takers and competition is based on price. - In the short run, individual firms have a perfectly elastic demand curve and produce at the quantity where marginal revenue equals marginal cost, given the fixed market price. - In the long run, firms enter and exit the industry to earn normal profits, resulting in economic equilibrium with price equal to minimum average cost for all firms.

2. 
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A market is a system by which buyers and
sellers transact their business.
The price of a commodity traded in the
market is determined by the number of
buyers and sellers.
The number of sellers of a product in the
market determine the nature and degree of
competition.
The nature and degree of competition make
the market structure.

4. 
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It is a market form in which there are large
number of sellers and buyers of
homogeneous product. There is freedom of
entry into and exit from the industry, and all
firms in the industry are price takers.
Uniform price prevails in the market, and
buyers and sellers possess perfect knowledge
of market conditions.
(Note: A firm is an individual producing unit,
while a group of firms producing a particular
commodity make up an industry.)

5. 
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Many small firms, each of whom produces an
insignificant percentage of total market
output and thus exercises no control over the
ruling market price.
Many individual buyers, none of whom has
any control over the market price.
Perfect freedom of entry and exit from the
industry. Entry and exit from the market is
feasible in the long run. This assumption
ensures all firms make normal profits in the
long run

6. 
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Homogeneous products are supplied to the
markets that are perfect substitutes. Hence
firms are “price takers” and face a perfectly
elastic demand curve for their product
Perfect knowledge – consumers have readily
available information about prices and
products from competing suppliers and can
access this at zero cost.
Perfect mobility of goods and factors among
firms and even different industries
No transport cost for carrying the product.

7. 1. Firm’s Demand Curve under Perfect
Competition
Demand curve of the firm under perfect
competition is perfectly elastic as price of
the product is fixed by industry and firm is
just price taker. So demand curve is parallel
to X-axis .The firm has just to take the
decision regarding the level of output it
wants to produce at the price which is fixed
by industry.

8. Demand curve under perfect competition

9. 2. Industry’s Demand Curve
It is also called market demand curve. It refers to
total demand for a product in the market. Obviously,
at a higher price, demand would be low, while at a
lower price, demand would be high.

10. 3. Relation between AR and MR for a Firm
For a firm, AR=MR under perfect competition
because price or AR (say) is constant. Therefore AR
curve of a firm is a straight line and is parallel to Xaxis. Since AR=MR here, AR and MR curves coincide
with each other and AR or say demand curve of the
firm is perfectly elastic.

11. Example
Price
Quantity
TR
AR
MR
10
1
10
10
10
10
2
20
10
20 – 10 =
10
10
3
30
10
30 – 20 =
10
10
4
40
10
40 – 30 =
10
10
5
50
10
50 – 40 =
10

12. With increase in demand because of
reasons other than price, the price of the
commodity increases for the same supply.
 With decrease in supply because of
reasons other than price, the reduced
quantity is supplied at a higher price.
(Graph)
e.g. – daily vegetable market, milk market,
stock market etc.


13. Price determination in market period (very
short run):
 Output (supply) is assumed to be fixed
considering the time period. Hence supply
curve is perfectly inelastic.
 In such a case, price is determined by
demand conditions.
 The point at which the demand for a product
meets its supply , price related to that point
is fixed as market price.

14. 
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Short run is a functional time period during
which a firm cannot change its size as
certain fixed factors and the plant cannot be
altered.
Since the firm is a price taker, it has a
perfectly elastic demand for its product so it
can sell whatever it produced at a given
price.
Since the price is predetermined, the firm
can only decide about the optimum quantity
at equilibrium point where profit is
maximised.

15. A firm will go on expanding its output as long
as every additional unit produced adds more
to its total revenues than what it adds to its
total costs..
 The firm will not produce a unit which adds
more to its total costs than what I adds to its
total revenue.
 This means the firm will be increasing its
profits by expanding its output to the level
at which the MR just equals MC.
Let’s understand this with an example
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16. Price/u
nit
Output
TR (Rs.) TC (rs.)
Profit
MR
MC
10
0
0
10
-10
0
0
10
1
10
16
-6
10
6
10
2
20
20
0
10
4
10
3
30
21
9
10
1
10
4
40
22
18
10
1
10
5
50
25
25
10
3
10
6
60
30
30
10
5
10
7
70
37
33
10
7
10
8
80
47
33
10
10
10
9
90
61
29
10
14
10
10
100
81
19
10
20

17. 
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The equilibrium level of output at a
given price is determined by
comparing SMC with SMR.
In the short run MR depends on the
price of the product.
Price of the product is market
determined by the intersection of
short period demand and supply
curves. (refer graph)

18. 
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From the firm’s point of view, at this short
run price, the demand for the product is
perfectly elastic.
Correspondingly, the SAR and SMR curve shall
be a horizontal line parallel to the x-axis.
SAR will be equal to SMR as illustrated
below.
Quantity
AR= P
TR
MR
1
250
250
250
2
250
500
250
3
250
750
250
4
250
1000
250
5
250
1250
250

19. Along with this, the SAC and SMC are drawn
in comparison.
 Point of equilibrium : SMC= SMR
(refer graph)
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21. 
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In short run equilibrium, the profitability of a
firm depends on the condition of average
revenue and the level of average cost
function.
The price is not stable and changes with he
changing conditions of demand and supply.
The firm has to adjust its output with
respect to changing prices.
When P or AR>AC ; excess profit
When AR=AC ;normal profits
When AR<AC; losses. (refer graph)

24. 
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In the long run, the firms can adjust their
size or quit the industry and new firms can
enter the industry.
When AR>AC , firms make excess profits
which lure other firms to enter the industry.
Entry of new firms increases supply and pulls
down price, setting equilibrium at a new
market price.
The firm will produce a changed quantity of
output at which LMR= LMC

25. 
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At this level, the LAR can be greater than
LAC, can be equal to LAC or can be lower
than LAC.
In the latter 2 conditions, the firm will earn
normal profits or will incur losses.
Firms earning normal profits is the most ideal
situation in Long run.
If they face losses, they quit the industry.

27. 
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LMC= LMR, profit is maximized
LAR (Price) = LAC, normal
profits
LMR = LAR, firm is a price taker
LMC= LAC, the firm is operating
at minimum average cost.