Perfect competition

BUDDHA N. SHRESTHA

market

Market structures

1. Perfect competition2. Monopoly3. Monopolistic competition4. Oligopoly

Market means a place where there are many buyers andsellers with different products who are actively engaged inbuying and selling acts.

The price and level of production of a commodity dependsupon the market structure of its conditions.

A perfect competition market refers to the competitionamong the sellers and buyers. Where are large numberof potential firms and sellers, and large number ofpotential buyers with a homogeneous product and theprice of the product is determined by the market forcesin an industry.

Perfect competition market

Conti…

There is one price that prevails in the market. All firms sellthe product at the prevailing price.

According to Leftwitch, "Perfect competition is a market inwhich there are many firms selling identical product with nofirm being large enough relative to the entire market so asto be able to influence market price."

Examples of perfect competition:Financial markets – stock exchange, currency markets, bond markets

Perfect competition market

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a b c d e f g

sellers

buyers.

(1) Large number of buyers and sellers: There is a large number ofbuyers and sellers of a commodity under perfect competition

(2) Homogeneous Product: the product sold by the various firms arehomogeneous.

(3) Absence of artificial Restrictions: non-existence of any artificialrestrictions on the demands, supplies, prices of goods and factors ofproductions in the market. There must not be any external interventionin price fixation and any controls on the product.

(4) Free entry and exit: The firms are free to enter or to exit from theindustry whenever they want to do so. Any firm can enter or leave theindustry at any time as there are no legal restrictions.

Symptoms of Competition Market

(7) Non-Existence of transportation cost: A perfectly competitivemarket also assumes that it is essential that there is no transportationcost across different areas of the market.

(6) Perfect mobility of the factors of production: It means all thefactors of production are perfectly mobile under perfectly competitivemarket. Factors will move to the industry which pays the higherremuneration.

(5) Perfect knowledge about the market: There is perfect knowledgeon the part of buyers and sellers about market conditions. The buyersand sellers are fully aware of the price prevailing in the market.

Symptoms of Competition Market

8. Firms are profit maximizers.

The goal of a competitive firm is to maximize the profit.

This means that the firm will want to produce the quantity

that maximizes the difference between total revenue and

total cost.

Total Cost = Fixed Cost x Variable Cost

Total Revenue = Price x Quantity

ProfitFirms are profit maximizers.

In the perfectly competitive market, a single market price

determined by the forces of total demand and total

supply in market. Every seller or a buyer is a price taker.

Rs.50 Rs.50

Rs.40seller buyer

agree Don’t agree

agree agree

Bargaining is the major weapon of price determine in the competition market.

How is the market price Determined

What happens in a competitive environment

Supply increases – price falls

Long run – normal profit made

Choice for consumer

Other firms enter the industry to take advantage of profit

Advantages of Perfect Competition:

• High degree of competition helps allocate

resources to most efficient use

• Price = marginal costs

• Normal profit made in the long run

• Firms operate at maximum efficiency

• Consumers benefit

Fact is that; there is no perfect competition market in the world. It

is just a hypothetical concept. It is not possible to be

. BECOUSE it contains

Large area of market

Large number of seller and buyers

Same goods and commodities

same quality of goods

Same purchasing power of buyers

How it can be possible ?

THANK YOU