PRICE DETERMINATION UNDER

PERFECT COMPETITION MARKET

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Sandipana (5)
Aditi (26)
Anushka (41)
Sanjay (42)
Niharika(43)
INTRODUCTION

In a Perfectly Competitive Market or industry, the Equilibrium Price is

determined by the forces of demand and supply. Equilibrium signifies a state
of balance where the two opposing forces operate subsequently. An
Equilibrium is typically a state of rest from which there is no possibility to
change the system.
FEATURES OF PERFECT COMPETITION

• Large number of buyers and sellers

• The product is homogenous
• No barriers to Entry and Exit
• Absence of Government regulation
• Perfect mobility of factors of production
• Perfect knowledge
• No cost of transportation
• Profit Maximization
Price determination under perfect competition is analyzed
under three different time periods

Market Period: In a market period, the time span is so short

that no firm can increase its output. The total stock of the
commodity in the market is limited. The market period may be
an hour, a day or a few days or even a few weeks depending
upon the nature of the product.

Pricing in the Short Run- Equilibrium of the Firm: Short period is

the span of time so short that existing plants cannot be
extended and new plants cannot be erected to meet increased
demand.
Pricing in the Long Run: The long run is a period of time long
enough to permit changes in the variable as well as in the fixed
factors. In the long run, accordingly, all factors are variable and
non- fixed.
Equilibrium of the Firm under Perfect Competition

A firm is in equilibrium when it maximizes its profits. Hence, the output that offers
maximum profit to a firm is the equilibrium output. When a firm is in equilibrium,
there is no reason to increase or decrease the output.
SUPER NORMAL PROFIT

Firms in a perfectly competitive market can make supernormal profits but only in the
short run. Supernormal profit is made where average revenue exceeds average cost. In a
perfectly competitive market, firms are price takers which means that they have no
bearing on the market price. Normal profit is the minimum level of profit necessary for a
firm owner to keep their resources employed in their current use.
 FEATURES OF
MONOPOLY DUOPOLY
AND OLIGOPOLY
 MONOPOLY

A monopoly is a type of business distinguished by its

dominance in a market with minimal or no competition and a
lack of alternative products.

•Single seller
•Unique product
•Price maker
•Barriers to entry
•Market power
 DUOPOLY

A duopoly is a subset of an oligopoly where only two independent sellers exist.

These sellers can act independently or consider the influence of their actions on each
other.
When sellers recognize this interdependence, they factor in direct and indirect effects
on pricing.

•Two dominant firms

•Limited competition
•Strategic interactions
•Price interdependence
•Product variation
 OLIGOPOLY

In an oligopoly market structure, companies team up to reduce competition and dominate a

specific industry. These companies, whether large or small, often hold significant power due
to patents, financial strength, and control over resources.

•Few dominant firms

•Limited competition
•Price setting
•Barriers to entry
•Product variation
 Conclusion
In conclusion, price determination under perfect competition is a fascinating interplay
of market forces. In such a market structure, where numerous buyers and sellers
engage in homogeneous products with perfect information, prices are essentially
determined by the forces of supply and demand. The market-clearing price, where the
quantity supplied equals the quantity demanded, prevails as the equilibrium point.

Since each firm is a price taker and faces a perfectly elastic demand curve, they have
no control over the market price.
However, while perfect competition offers allocative and productive efficiency, it has its
limitations. The real-world application of perfect competition is rare, as many markets
exhibit elements of imperfect competition. Externalities, public goods, and the
unequal distribution of information challenge the assumptions of perfect competition.