Perfect Competition

Basic Structure of the Market

• Numerous buyers and sellers.
• No control over price by any single
seller
• Free entry and exit
• Homogenous product are sold
• No government intervention
 Examples
• Stock Market where numerous shares
of different companies are bought and
sold. No single buyer or seller can
influence the price of a share.
• Unskilled labour market- The price of
labourer is fixed at very low level. No
one can influence the price of one unit
of labour.
 Profit Maximization in Short Run
and Long Run
Equilibrium at P=MC both at Short run
In SR, firm may earn supernormal ,
normal profit and losses. In case the
firm makes loses, P should be greater
than AVC. Other wise firm shuts down.
In LR, firm only earns normal profit (no
profit-no loss) due to free entry and
exit.
 Loss and shut Down Decision
Q TFC TVC TC MC AVC
1 5 5 10 5
2 5 9 14 4 4.5
3 5 12 17 3 4
4 5 14 19 2 3.50
5 5 17 22 3 3.40
6 5 21 26 4 3.50
7 5 26 31 5 3.72
8 5 32 37 6 4
9 5 39 44 7 4.33