1) A perfect competition market is characterized by a large number of small firms producing homogeneous products and facing a uniform market price, with free entry and exit into the industry.
2) Under perfect competition, no single firm can influence the market price because individual firms make up a negligible portion of total market supply. The uniform market price is determined by industry demand and supply.
3) In the long run, firms in a perfectly competitive market earn only normal profits and are unable to earn super-normal profits due to free entry into and exit from the industry by new and existing firms.
1) A perfect competition market is characterized by a large number of small firms producing homogeneous products and facing a uniform market price, with free entry and exit into the industry.
2) Under perfect competition, no single firm can influence the market price because individual firms make up a negligible portion of total market supply. The uniform market price is determined by industry demand and supply.
3) In the long run, firms in a perfectly competitive market earn only normal profits and are unable to earn super-normal profits due to free entry into and exit from the industry by new and existing firms.
1) A perfect competition market is characterized by a large number of small firms producing homogeneous products and facing a uniform market price, with free entry and exit into the industry.
2) Under perfect competition, no single firm can influence the market price because individual firms make up a negligible portion of total market supply. The uniform market price is determined by industry demand and supply.
3) In the long run, firms in a perfectly competitive market earn only normal profits and are unable to earn super-normal profits due to free entry into and exit from the industry by new and existing firms.
1) A perfect competition market is characterized by a large number of small firms producing homogeneous products and facing a uniform market price, with free entry and exit into the industry.
2) Under perfect competition, no single firm can influence the market price because individual firms make up a negligible portion of total market supply. The uniform market price is determined by industry demand and supply.
3) In the long run, firms in a perfectly competitive market earn only normal profits and are unable to earn super-normal profits due to free entry into and exit from the industry by new and existing firms.
Meaning: A market in which there is large number of buyers and sellers of homogeneous products and uniform price exists is called perfect competition market. Features of perfect competition: Large number of buyers and sellers: There are a large number of buyers and sellers of the commodity in the market. Each one of them is too small relative to the market as a whole and cannot exert any perceptible influence on prices. Implication: The number of sellers is so large in perfect competition that each seller supplies a very small portion of the total quantity offered in the market. In this situation any increase or decrease in supply by an individual seller has negligible effect on the total supply of the commodity in the market. As a result, Single seller is not in a position to influence the price of the product and therefore, takes the price of the product as given. Similarly, the number of buyers in perfect competition is so large that the demand of each buyer is very small to the total demand of the market. Under such condition, no single buyer shall be able to influence the market price of the commodity by increasing or decreasing its purchase. Homogeneous Product The product of each firm in the market is homogeneous. It means product of various firms are perfect substitute for one another. Implication: As a result of homogeneous products, the buyers cannot distinguish between the product of one firm and that of another. Therefore, buyer becomes indifferent to the particular firm from which he buys. In this situation, no firm can charge different price of the product it produces. Hence a uniform price prevails in the market and demand curve is perfectly elastic. Freedom of Entry or Exit Entry (or exit) of the firms into (or from) the market is free in the perfect competition. This means that any new firm is free to start production, if it so wishes, and that any existing firm is free to cease production and leave the industry if it so wishes. Existing firms cannot bar the entry of new firms and there are no legal prohibitions on entry or exit. Implications: The features of free entry or exit implies that no firm under perfect competition earns super normal profit or incur losses in the long run. If the firm are earning super normal profit, the new firms will enter in the industry. As a result, supply will increase and price will start to decline. The process will continue till the firms earn only normal profit. On the other hand, if firms are incurring losses, a few firms will exit from the industry. Thus, supply will decrease and price will increase and ultimately firms will earn only normal profit. Thus, free entry or exit implies that firms under perfect competition can earn only normal profit in the long run. Perfect Mobility There is perfect mobility of factors of production both as geographically and occupationally. It means factors of production can freely move from one place to another as well as from one firm to the other. There is no restriction on the mobility of factors of production. Implications: Perfect mobility of factors of production implies that the firm can adjust their supply to the changing market demand. If the market demand exceeds supply, additional factors of production will move into the industry and vice-versa. Mobility thus, enables the firms and industry to adjust output and achieve an equilibrium position. Perfect Knowledge There is perfect and complete knowledge on the part of all buyers and sellers about the conditions in the market. For a market to be perfect, it is essential that all buyers and sellers should be aware of what is happening in any part of the market. Implication: When buyers are fully aware of the current price in the market, sellers cannot charge more than the prevailing price. If any seller tries to charge a higher price than that ruling in the market, then buyers will shift to some other sellers and buy the goods at the prevailing price. Similarly, all sellers are aware of the prevailing price in the market and no one charge less price than this. Thus, same price shall prevail throughout the market. Firms in the perfect competition also have knowledge about the inputs used in the production of the good. When the firms have the perfect knowledge about the quality availability and price of the inputs used in the production, every firm will use the identical inputs at the uniform price for its output. As a result, all firms will have uniform cost structure which will lead to the uniform price in the market. No Selling Cost Involved In perfect competition firms are selling homogeneous products and they are perfect substitute. Therefore, no advertisement cost is involved in perfect competition.
AR and MR curves under Perfect Competition:
Units of Output TR TR ∆TR
AR = Q MR = ∆Q Sold (₹) (₹) (₹) (Q) 0 0 5 5 1 5 5 5 2 10 5 5 3 15 5 5 4 20 5 5 5 25 5 5 6 30 5 5 TR curve under perfect competition is a straight line because the market price always remains constant. In perfect competition AR = MR Both AR and MR are constant and parallel to X-axis. A Firm Under Perfect Competition is Price-Taker and Not a Price-Maker
Fig A Fig B
In a perfect competition market, the price of a commodity is determined by the demand and supply of the industry. A firm working under the industry has to accept the price quoted. Therefore, the industry is called price maker. Every firm has to accept the price determined by the industry. A firm can only decide how much amount of the commodity it wants to sell at a given price. Hence the firm is known as price taker
In perfect competition all firms sell homogeneous product. It implies that all firms charge the same price for the product.
