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PRICE DETERMINATION UNDER PERFECT COMPETITION PERFECT COMPETITION Perfect Competition is that situation of the market wherein there are large number of Buyers and sellers of a homogeneous product and the price of such a product is determined by the market forces i.e ,the industry. All firms sell the product at this price. In other words , there prevails only one price of a product in the market ASSUMPTIONS Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price. Homogeneous Products – The products of the different firms are EXACTLY the same, e.g. fruit. Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market. Perfect Information - for both consumers and producers Firms Aim to Maximise Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. PRICE UNDER PERFECT COMPETITION SUPPLY PRICE DEMAN OF PER D FOR GOOD- UNIT GOODX X 50 5 10 40 4 20 30 3 30 20 2 40 10 1 50 Y D P Industry surplus E S Equilibrium Price Price Shortage S o D Q Quantity Equilibrium price is determined at that point at which aggregate demand of commodity is equal to aggregate supply. x Effect of Change in Supply on Price Effect of change in Demand on Price y y d1 p1 Price s1 e1 d e d2 p d1 e2 p2 Price d p1 p p2 d d2 o q2 q q1 e1 s2 e e2 s1p 2 s d s2 x o q1 Quantity D P s q q1 Quantity S P x Time Element Very Short Period Market Price Short Period Sub Normal Price Long Period Very Long Period Normal Price Trade Cycle DETERMINATION OF MARKET PRICE OR VERY SHORT PERIOD EQUALIBRIUM MARKET PRICE: Price of commodity which prevails in a market at a particular time. There are two types of Goods in the market as:Perishable Goods Durable Goods Perishable Goods y d2 p1 p p2 d d1 d1 y s P R I C E e1 e e2 d2 o Durable Goods d s Quantity Here supply remain fixed d e1 p1 d2 p e e2 p2 d1 S s d d1 d2 x o x q2 q q1 Quantity Here supply increased upto certain limit then become vertical. Short Period y d y s d1 e1 p1 d2 Price p e2 p2 Long Period p1 e Price S s d1 E p d q2 q q1 Quantity D p2 S d2 o S x Supply can be increased upto its existing Production capacity. Firm is continue to produce in the short period even when it o D Q2 N Q M Q1 Quantity S D P S D P x
