2. PERFECT COMPETITION
According to Boulding
“A perfect competition market may be defined
as a large number of buyers and sellers all
engaged in the purchases and sale of identically
similar commodities, who are in close contact
with one another and who buy and sell freely
among themselves.”
Dr. RAKSHA SINGH
3. CONDITIONS OF PERFECT
COMPETITION
1. Large number of buyers and sellers
It must be large so individually not able to influence price and output of industry.
Supplier is ‘output adjuster’
2. Homogeneous Product
Product produced by all sellers are perfect substitutes. E.g. Salt, Wheat, Cotton
3. Freedom of entry and exit of firms
If industry earns excess profit ,new firms join .In case of loss some firms leave
4. Perfect mobility of Goods and factors
Goods are free to move to those places where they can fetch the highest price.
Factors can also move from a low paid to a high paid industry.
5. Absence of artificial restrictions
Prices are liable to change freely in response to demand-supply conditions. No
restrictions from government or other industries
Dr. RAKSHA SINGH
4. CONDITIONS OF PERFECT
COMPETITION…
6. Absence of Transport costs
If transport cost is added ,even a homogeneous commodity will have different
prices depending upon the transport costs from the place of supply
7. Perfect knowledge of Market conditions
Buyers and sellers know everything
8. Uniform Price
Since price is determined by joint efforts of buyer and seller, same price prevails in
the market
9. Normal Profit maximization
All firms have a common goal of profit maximization ,but can make super
normal profit in short run in long run only normal profit
10. No Discrimination
Buy and sell freely without offering any discount or favours to selected individuals
Dr. RAKSHA SINGH
5. PERFECT Vs PURE
COMPETITION
They differ only in degree
Pure competition is narrower term
Pure competition includes only
Large number of buyers and sellers
Homogeneous products
Free entry and exit
Real world does not fulfil the conditions of perfect competition
and Pure competition but we study this to understand
working of an economy.
Dr. RAKSHA SINGH
6. PRICE DETERMINATION UNDER
PERFECT COMPETITION
Under Perfect Competition Industry is Price Maker and
Firm is Price Taker
Two parties that bargain in a market- Buyers and
Sellers
It is only when they agree a commodity can be bought
and sold at a certain price
Product pricing is influenced by both- B&S
Law of demand is applicable to buyers
Law of supply is applicable to sellers
Dr. RAKSHA SINGH
8. PRICE DETERMINATION UNDER
PERFECT COMPETITION…
Firm will be in equilibrium when it will earn
maximum profit
Two conditions must be fulfilled
First order Condition (Necessary Condition)-
Marginal Revenue =Marginal Cost
MR must be equal to MC
Second order Condition (Secondary and Sufficient
condition)-
MC Curve must cut MR from below,
MC Curve must be rising
Dr. RAKSHA SINGH
9. PRICE DETERMINATION UNDER
PERFECT COMPETITION…….
Equilibrium at point E where
MC=MR and MC cuts from below
Dr. RAKSHA SINGH
In the curve
OY axis measures
Revenue=Price=Cost
OX axis measures Output
MC= Marginal Cost curve
OP= Price=MR=AR
At Point T and E MC cuts MR
As per first condition T and E
both are fulfilling but as per
second condition /sufficient
condition,
Equilibrium of firm will be at
Point E
TP E
10. EQUILIBRIUM OF A FIRM IN
SHORT RUN
Short Run is characterised by the market condition in
which new firms cannot be established
Firms cannot expand their output
No new techniques will be developed
During short run, firm has to confront with two types of
cost
Fixed Cost-Not possible for the firms to recover the FC in
the short run .Therefore firms output decision are not
influenced by the fixed cost
Variable Cost – Firm must recover variable cost in the
short run, In case firm fails to recover the average
variable cost in the short run, firm will decide not to
produce and shut down the business to minimise losses
Dr. RAKSHA SINGH
11. EQUILIBRIUM OF A FIRM IN
SHORT RUN….
• 1. Case
Short Run
Supernormal
/Abnormal
Profits
• 2. Case
Short Run
Economic
Loss
• 3. Case
Short Run
Normal
Profits
In the short run three cases
Dr. RAKSHA SINGH
12. EQUILIBRIUM OF A FIRM IN
SHORT RUN..1
Firms Equilibrium is attained at green
point where MC=MR &MC cuts MR from
below, at Price=P and Output=Q
Average Cost to produce goods is at
black point ,cost price is =C
Average cost to produce goods is at
Black Point Price =C and Output=Q
Supernormal Profit area is in
green(rectangle), Where selling price is
P and Average Cost is C
In this situation more firms enter,and
start this business to share profit
Dr. RAKSHA SINGH
13. EQUILIBRIUM OF A FIRM IN
SHORT RUN..2
Firms Equilibrium is attained at
green point where MC=MR
&MC cuts MR from below. at
Price=AR
Average Cost to produce goods is
at black point ,cost price is =C
Economic Loss area is in brick
colour(CP..) because Cost is
more that selling price
In this situation firms will exit
Dr. RAKSHA SINGH
14. EQUILIBRIUM OF A FIRM IN
SHORT RUN..3
Firms Equilibrium is
attained at price P where
MC=MR=AR
AC = AR= P( Price) Cost
to produce is equal to
AC=P and AVC is below
AC(AVC<AC)
Firm will earn Normal
Profit
Firms neither enter nor
exit
Dr. RAKSHA SINGH
15. EQUILIBRIUM OF A FIRM IN
LONG RUN
In the long run
firm will earn only
normal profit
Inefficient firms
will close down
or try to
improve
efficiency
MR=LMC=LAC=
AR=Price
Dr. RAKSHA SINGH
16. Questions
Q1 In the perfect competition
at short run, the firm is a price
……and can sell… amount of
output at the going market
price
1.Taker, a definite
2.Maker,any
3.Taker,any
4.None of the above
Q2 For a competitive firm,long
period normal price will
1.Equal AC and MC or
production
2.Equal MC of production
only
Equal TC of production only
Equal AC of production only
Dr. RAKSHA SINGH
19. References
Dr. RAKSHA SINGH
www.economicsdiscussion.n
et/perfect-
competition/perfect-
competition
Modern Economic Theory,
KKDewett,2000
Wikipedia
Google photos
IC Dinghra, 1999
In this connection Mrs. Joan Robinson has said—”Perfect Competition prevails when the demand for the output of each producer is perfectly elastic.”
Output adjuster- individual seller is unable to influence the price of the product by increasing or decreasing its supply. Rather ,he adjusts his supply to the price of the product, (drop in a ocean)
Cook of road side dhabha Raju will join as chef in three star or five star hotel
or example, agricultural markets particularly up through the beginning of the 20th century, were viewed as being close to a real-world version of a perfectly competitive market. But as the technology is keep on growing now, farmers can grow their crops much faster and much better and the quantity and the cost used to produce the crop differs for each farmers. In this situation, agriculture cannot become a perfect competition anymore.As put by the American economist Edward Chamberlin, pure competition is “competition unalloyed with monopoly elements”, whereas perfect competition involves “perfection in many other respects than the absence of monopoly.” Pure competition is characterised by the absence of any monopoly element.
Output adjuster- individual seller is unable to influence the price of the product by increasing or decreasing its supply. Rather ,he adjusts his supply to the price of the product, (drop in a ocean)
Cook of road side dhabha Raju will join as chef in three star or five star hotel
or example, agricultural markets particularly up through the beginning of the 20th century, were viewed as being close to a real-world version of a perfectly competitive market. But as the technology is keep on growing now, farmers can grow their crops much faster and much better and the quantity and the cost used to produce the crop differs for each farmers. In this situation, agriculture cannot become a perfect competition anymore.
Agriculture: In this market, products are very similar. Carrots, potatoes, and grain are all generic, with many farmers producing them. ...
Street food, free software awasthi golgappe in civic centre you will shift from one thela to other if price differs
It hardly matters who produces roofing nails ,paper clips
Pencils Natraj so far I remember if you know some more message me
escription: Ideally, perfect competition is a hypothetical situation which cannot possibly exist in a market. However, perfect competition is used as a base to compare with other forms of market structure. No industry exhibits perfect competition in India.
Law of Demand – when price rise demand falls and when price falls demand rise
Law of supply- when price rise supply rise and when price falls supply falls
B&S Buyers and Sellers
Law of Demand – when price rise demand falls and when price falls demand rise
Law of supply- when price rise supply rise and when price falls supply falls
MC = Marginal Cost Curve
MR= Marginal Revenue Curve
AC=AFC+ AVC
LMC= long Run marginal Cost
Q1-3 Q2-1
Perfect Competition योग्य प्रतिद्वंदी
Thanks to my son Advaya for great help https://www.youtube.com/watch?v=bwF2UhagVng&t=225s