PERFECT COMPETITION MARKET

Market refers to all such system or arrangements that bring the buyers and sellers in contact with each other to settle the sale and purchase of goods.

PERFECT COMPETITION- It is a form of form of market where there is large no. of buyers and sellers of a homogeneous product whose price is determined by forces of supply and demand. An individual buyer has no control over price.

FEATURES- i) Large no. of buyers and sellers: All producers contribute insignificantly to the market. A firm can sell any amount of good at given price it cannot influence market price. So firm is considered as price taker, not maker.

ii) Homogeneous Product- Zero degree of product differentiation led uniform price in market. There is no selling or advertisement costs.

iii) Free entry and exit conditions- Firm earn only normal profits in long run as in case of extra normal profits new firms will join industry and supply increases causing fall in price and vice-versa.

iv) Perfect knowledge on the part of buyers and sellers- The buyers know in full about the commodity sold and the price prevailing in the market. The sellers know the potential sales at various price levels in the market.

v) Independent decision making- Firms do not form trusts or cartels so we have maximum output and minimum price.

vi) Absence of transport cost- If transport costs are incurred, prices should be different in different sectors of the market.

vii) Perfect mobility of factors of production- It leads to uniform price of factor, no matter who hires it.

In the long run, perfectly competitive firms will react to profits by increasing production. They will respond to losses by reducing production or exiting the market. Ultimately, a long-run equilibrium will be attained when no new firms want to enter the market and existing firms do not want to leave the market, as economic profits have been driven down to zero.

So this competition is hypothetical in nature.

Price Determination under Perfect Competition: Equilibrium of Firm
PRICE ELASTICITY IS INFINITY.

Categories: Business