PERFECT COMPETITION

Lecture on:(a) Features of Perfect Competition(b) Price and Output Determination

B.TECH, (CSE)Managerial Economics and Financial Analysis11-2-2013

Features of Perfect Competition:

Large number of buyers and sellersHomogenous products and servicesFree entry and exitPerfect information about market

conditionPerfect mobility of factors of productionUniform price levelNo transport costDifference between firm and industry

PRICE – OUTPUT DETERMINATION IN PERFECT COMPETITION

Prices are determined by demand and supply forces

The price and output are determined at the point where the demand and supply both are equal under perfect competition

This can be understood by taking an example and plotting it on the graph

EXAMPLE AND DIAGRAMATIC EXPLANATION

PRICE (Rs) DEMAND SUPPLY

5.00 200 600

4.00 300 500

3.00 400 400

2.00 500 300

1.00 600 200

Diagrammatic Explanation: Y AXIS

P D SR E I CE S D

0 X AXIS

OUTPUT

Price and output determination when demand changes and supply remains constant

Y axis D1 S

P1 D E1

P E

D2 D1

P2 E2

D

S

D2

0

M2 M M1

Price and output determination when demand remains constant and supply changes

Y axis D S2

P1 E2

S

S2 E

P S1

S E1

P2

S1

Price and output determination when both demand and supply are changed

Y D D1

p D2 S2 S S1

R P E2 E E1

I S D S1 D1

C S2 D2

E 0

M2 M M 1 X