Perfect Competition

Market

Welcom
e
 Meaning of
Market
A place / regio wher Sellers and buyers
interacted n goods e servic are by
with
purchasing at a given
and price. It eis considered
sellingas aand
Process

• Goods and service

• Buyers and sellers
• A place or region
• Given price
 Perfect Competition
Market

Classification of Market

Markets
Form
Perfect Imperfect Monopol
Competition Competition y
Monopolistic
Competition

Oligopol

y
 Meaning of Perfect Competition
Market

“A Market situation in which a large number

of producers or sellers producing and selling
homogeneous product.”
 Meaning of Perfect Competition
Market

“A Market situation in which a large number

of producers or sellers producing and selling
homogeneous product.”
 Main features of Perfect Competition
Market

• Each sellers sell a small portion total

Large no. of • Single sellers has no influence on
buyers and market
• Sellers are price taker
sellers
• Identical product
• Same price and
Homogeneous cost
product
• There is no government or other
control
Free entry
and exit
 Main features of Perfect Competition
Market

Perfect • Perfect knowledge about the prevailing

knowledge about price.
market
Absents of • Large no. of firm, so no transport or
selling cost and selling cost
Advt. cost • Homogeneous product, so no advt.
needed

A single price • Price is determined in the

of product industry .

Example: Agricultural products

 Meaning of Perfect Competition
Market
Nature of demand and AR, MR Curve of a
firm
Out
Out put Price
Pric TR
T AR
A MR
MR
put 1 e 10 R10 R10 10 Demand and AR, MR Curve of a
1 1
firm
2
2 0
10
1 20 10 10
3
3 0
10
1 30 10 10
Price
4
4 0
10
1 40 10 10
5
5 0
10
1 50 10 10 Price=AR=MR
6
6 0
10
1 60 10 10
7
7 0
10
1 70 10 10
8
8 0
10
1 80 10 10 Output
0
Meaning of Perfect Competition
Market
Price determination in the
industry

Excess supply

Supply Curve

Price

Demand Curve
Excess Demand

Output
 Meaning of Perfect Competition
Market
Price determination in the
industry
Industr Firm ( is a Price
y Taker)
Supply Curve

Price Price

Price=AR=MR

Demand Curve

Output Output

 First Condition for maximization of profit > MR= MC

 Second Condition for maximization of profit > MC curve cut MR curve

from bellow
 Meaning of Perfect Competition
Market
Price determination in the
industry
Industry Firm ( is a Price
Supply Curve Taker)
Price Price
Price=AR=MR
Demand
Curve

Output Output

What is level of
output of a firm ?

 First Condition for maximization of profit is MR= MC

 Second Condition for maximization of profit is MC curve cut MR curve

from bellow
 Meaning of Perfect Competition
Market
The firms equilibrium(Out put
determination)
 First Condition for maximization of profit is MR= MC

 Second Condition for maximization of profit is MC curve cut MR

curve
from bellow

Industr Firm ( is a Price

y Taker)
Supply Curve
MC
Price Price
MC=MR
Price=AR=MR
E0 E

Demand Curve

O M
Output Output
 Meaning of Perfect Competition
Market
Short run equilibrium of a firm with abnormal
profit
Firm with Profit

MC
Price AC
MC=MR
Price=AR=MR
Profit E

O M
Output
 Meaning of Perfect Competition
Market
Short run equilibrium of a firm with No profit No
Losses
Firm with Profit

MC
Price AC
MC=MR
Price=AR=MR
E

O M
Output
Meaning of Perfect Competition
Market
Short run equilibrium of a firm with
Losses
Firm with Profit

AC

MC
Price

Losses Price=AR=MR
E
MC=MR

O M
Output
 Meaning of Perfect Competition
Market
Long run equilibrium of a firm with Normal
Profit
Firm with Profit

LMC
Price LAC
MC=MR
Price=AR=MR
E

O M
Output
Perfect Competition
Market

Thank
s