D C M T (MBA) – 2021-22 ME ( UN - 03 )

Chapter : Market & Output Determination Topic : Perfect Competition

 Concept :
 Market - In ordinary sense, market is a place where commodities are bought and sold. However, in
economics, it refers to " a mechanism by which buyers and sellers of a commodity are able to
contact each other for having economic exchange and able to strike a deal about the price and the
quantity to be bought and sold".
 Market Structure: It refers to the types of market in which the firms operate. Various market forms
are broadly classified on the basis of no. of buyers and sellers, nature of product and degree of control
over Price.

 Types of Market No. of Firms Nature of Product Control over Price

A. Perfect Competition Very Large Homogenous None
B. Imperfect Competition:
i) Monopoly Single Unique Full
ii) Monopolistic Competition Many Heterogeneous Some
but are close substitutes
iii) Oligopoly
a. Pure Oligopoly Few Without Product Some
Differentiation
b. Differentiated Few With Product Some
Oligopoly Differentiation
 Perfect Competitive Market : -
Defined as the market structure with the followingcharacteristics :
 Large number of sellers that no seller is able to dominate in the market.
 Large numbers of buyers that no individual buyer is able to influence the marketprice in any
way.
 The product of all firms is homogenous / identical in nature.
 Free entry and exit for the firms.
 Perfect knowledge among the buyers and sellers about the market conditions inwhich they
are operating.
 Perfect mobility of resources. All the firms in the perfectly competitive industryshall have
identical cost conditions.
 Absence of any transport cost of the product from one part of the market to theother.

 Producer Equilibrium : Refers to that price and output combination which brings maximum profit to
the producer and the profit declines as more is produced.
Approaches :
1. TR and TC Approach – Maximum profit is where the vertical distance between TR and TC is the highest.
2. MR and MC Approach – MC = MR -As long as MC is less than MR, it is profitable for the
producer to go on producing more because it adds to its profits. He stops producing more only when
MC=MR.

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D C M T (MBA) – 2021-22 ME ( UN - 03 )

Producer equilibrium will be determined at OL2 level corresponding to point Q2 , because at this point
the following two conditions are satisfied i.e. MC=MR and MCIs rising after the point of intersection.

Equilibrium of the firm in the Short-run-

The short-run equilibrium of the firm is illustrated by combining the short-run cost curve with the demand curve
(AR Curve) faced by the firm. The firm is here a price taker rather than price setter. It has to decide the amount of
output it should produce and sale at a given price so as to maximise its profits.

a. IF AR ˃ SAC, it means the firm is earning abnormal or super normal profits.

b. If AR ˂ SAC, then the firm is incurring losses.
c. If AR = SAC, means the firm is making normal profit.

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 D C M T (MBA) – 2021-22 ME ( UN - 03 )

Equilibrium of the firm in the Long-run and determination of Price and output-

Long-run is a period in which the existing firms may leave and new firms may enter the industry.
A firm under perfect competition will be in equilibrium in the long-run when it earnsonly normal
profits. The key to long-run equilibrium is free entry and free exit.
There are two conditions which must be fulfilled by a firm to be in equilibrium in the long-run.
1. P (AR) = LAC
2. LMC = MR and also that the LMC curve cuts the MR curve from below.
3. Since under the perfect competition, AR = MR, we can write the equilibriumcondition as
LMC = LAC = MR = P
Long-run equilibrium of the Industry:
An industry is in equilibrium, when two
conditions operate:

1. When its market demand = market supply.

Under such situation, there would be no

tendency for the price to change.

2. When the industry is neither expanding nor

contracting..

Thus, the industry would be in the long-run

equilibrium when all the firms areproducing at their minimum point of the LAC Curve.

Different Violations of Perfect Competition:-

1. Even in competitive markets, some buyers or sellers may have individual influence.

2. Buyers and sellers as well as resource owners do not have perfect knowledge of themarket prices.
Union of buyers and sellers restrict the process of price determination.

3. There are many obstacles in the mobility of labour.

4. Govt. also regulates the demand and supply of many commodities.

5. Entry of industries is blocked by economic, legal or institutional factors.

Reasons for study of Perfect Competition:-

1. It is good simplification to start understanding the price theory. After studying it,we can go on
study of more realistic analysis of price determination.

2. Perfect competition is an ideal organisation of market that can serve as a goodperspective to

compare the actual allocation of resources.
Perfect competition was the standard model of a market with the classical economists. Even Prof. A.
Marshal also discussed the determination of price under perfect competition.

END.

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