PRESENTED BYANJALI AGARWAL BHAVESH BAJAJVANITA CHHATANIJASNA

DOLARAMANIROSHNI GANDHI

INTRODUCTION

Perfect competition is a market situation where there are large number of buyers and sellers and single uniform price prevails in the market which is determined by the forces of total demand and total supply. Under perfect competition a seller is the price taker and not price maker. Everyone has to accept the prevailing market price as no one is in the position to influence the price individually.

The concept of perfect competition is introduced by DR.ALFRED MARSHALL.

In the perfect competition many firms sell a standardized product

In the perfectly competitive market we typically find many buyers and sellers of a product each individual player in the market is relatively small and cannot influence the market as a whole firms in such a market are generally called as the price takers.

In such a perfectly competitive market, the product is seen by consumers as ''homogeneous''; there is no difference in quality of product, if we buy from firm A or firm B

DefinitionBusiness firm - an organization set up

and managed for the purpose of earning profits for its owner by producing goods and services for sale in markets.

According to the oxford dictionary of economics perfect competition is an ideal market situation in which many buyers and sellers are so numerous and well informed that each can act as a price taker, able to buy and sell any desired quantity, without affecting the market price.

Features Large Number Of SellersAbsence Of Transport CostLarge Number Of BuyersHomogenous ProductsIgnores Government InterferencePerfect Knowledge On The Part Of Buyers & SellersOffers Free Entry & Free Exit For FirmsRational Behaviour ( Rationality)Single (Uniform) PricePerfect Mobility Of The Factors Of Production

LARGE NUMBER OF SELLERSExistance of large number of sellers is one of

the important features of perfect competition market.As there are millions of sellers, the share of each seller is not in a position to influence market price. The price is determined by the forces of total demand and total supply. The prices that prevails in the perfect competition is uniform throughout the market.All the sellers will take the price as given. That is why they are called price takers and not price makers.

Absence Of Transport CostIt is assumed that there is absence of

transport cost since all firms are equally close to the market ; or there is equal transport cost faced by all, as all firms are supposed to be equally far away from the market. Hence the element of transport cost can be ignored.

Large Number Of BuyersThe number of buyers in the market are very

large. A single buyer cannot influence the market demand as his share is normal. Also he is price taker in the market.

Homogenous ProductsIn perfectly competitive market, the products of

all firms are homogenous i.e they are identical in size, shape, colour, design, etc. In other words, they are perfect substitutes of one another.

Ignores Government Interference

Government interference may bring tariff, subsidies, controls, licensing which may disturb the free functioning of the market mechanism.

That is why it is assumed that there is no government interference in the economic activities of the people.

Perfect Knowledge On The Part Of Buyers & Sellers

The buyers & the sellers possess perfect knowledge regarding market conditions. The buyers know the ruling market price and hence they will not offer any high price. On the other hand the sellers are aware of the prevailing market price and hence they will not charge lower price. As buyers & sellers possess perfect knowledge of the market there is no necessity for the sellers to go for advertising & publicity.

Offers Free Entry & Exit for FirmsPerfect Competition is characterized by freedom of entry and exit of firms i.e an existing firm can leave the industry whenever it desires to do so and a new firm can enter the industry whenever it wishes to do so.

Rational BehaviourUnder this market category, the sellers and

buyers behave rationally. Producers undertake production with a sole intention of profit maximization and consumers consume (demand) to derive maximum satisfaction.

Single (Uniform) PriceUnder this market category, uniform price

prevails. Price gets determined at the intersection of market demand and market supply.

Perfect Mobility on the Factors Of Production

The factors of production are perfectly free to move from one firm to another ; or from one industry to another ; or from one region to another ; or from one country to another.

The Definition of Supply and Perfect CompetitionIf all the necessary conditions for perfect

competition exist, we can talk formally about the supply of a produced good.

This follows from the definition of supply.SupplySupply is a schedule of quantities of goods

that will be offered to the market at various prices

The Definition of Supply and Perfect Competition

This definition requires the supplier to be a price taker (the first condition for perfect competition).

• Since most suppliers are price makers, any analysis must be modified accordingly.

• Because of the definition of supply, if any of the conditions are not met, the formal definition of supply disappears.

Demand Curves for the Firm and the IndustryThe demand curves facing the firm is

different from the industry demand curve.A perfectly competitive firm’s demand

schedule is perfectly elastic even though the demand curve for the market is downward sloping.

This means that firms will increase their output in response to an increase in demand even though that will cause the price to fall thus making all firms collectively worse off.

Market supply

Marketdemand

1,000 3,000

Price$10

8

6

4

2

0Quantity

Market Firm

Individual firm demand

Market Demand V/s Individual Firm Demand Curve

10 20 30

Price$10

8

6

4

2

0Quantity

Case StudyPerfect competition, according to economists, is the most competitive market imaginable. In the real world, it is rare, and there are even some economists that feel it may not even exist in its purest form.

Perfect competition exists in our markets but not with all the features.

Large number of Buyers and Sellers :-

The markets visited by me and my group had large number of buyers and sellers selling homogenous commodities.

Mr. Aziz Sheikh at Fashion Street (shop no. 17)

told us “the price of the commodities is determined by them according to the cost of production.”

Free entry and exit :-He also told that they do not have much of government interventions. Anybody can come and sell goods and exit willingly. They need to own a government license to conduct the business there.

The market has homogeneous products available in it. These products are sold at different prices to the customers, by different sellers in the same market.

Perfect Mobility of Factors of Production and No Transport Cost:-

Mr. Arshad at Crawford Market (street hawker) told us that there transport cost is nil as they get the goods by themselves. The place from where they get goods is near by so there is quick movement of goods and free of cost.

Where as,

At fashion Street, the transportation of goods from place of production to market is not free as they themselves go and get the goods. The travelling charges are paid by them.

Price Taker or Price Maker ?

The firms are price makers as they determine the prices according to the price in which they buy the goods.

The buyers are the price takers as the commodities are purchased at fixed prices. But the situation is not same in all the markets.

Complete Market Information:-

Sellers do not have complete information relating to demand and supply. They only know the prices prevailing in the market presently and sell goods accordingly.

Therefore, from the above case study we can conclude that perfect competition does exist but not completely. The markets taken into consideration has certain features in favour and some features against perfect competition. Features like large number of buyers and sellers, homogeneous products, no government restrictions are seen in these markets. But there is lack of complete market information and free transportation of goods.

The markets included for case study are:- Crawford Market, Fashion Street, Linking Road.

BIBLIOGRAPHY & WEBLIOGRAPHY

Bibliography : 12th standard textbook – Michael Vaz

Webliography : www.wikipedia.com www.businessdictionary.com www.Tutor2u.net.

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