Meaning:
A situation where there are many firms competing in the market, there is lot of competition and the firm producing the best quality goods and services at lowest price will be successful.
Features:
1. Large number of sellers
2. Large number of buyers
3. Free entry and exit
4. Homogeneous product
5. Single price
6. Perfect knowledge
7. Perfect mobility of factors of production
8. No transport cost
9. No-intervention of government
1. Large number of sellers/sellers are price takers
There are many potential sellers selling their commodity in the market. Their number is so large that a single seller cannot influence the market price because each seller sells a small fraction of total market supply. The price of the product is determined on the basis of market demand and market supply of the commodity which is accepted by the firms, thus seller is a price taker and not a price maker.
2. Large number of buyers:
There are many buyers in the market. A single buyer cannot influence the price of the commodity because individual demand is a small fraction of total market demand.
3. Free entry and exit:
New firms can enter and exit the market without any restrictions.
4. Homogeneous product:
Firms produce and sell identical units of a given product, in perfectly competitive market, i.e., units of a commodity produced by each of them is uniform, in respect of size, shape, colour, quality, etc. Thus commodities have perfect substitute for each other.
5. Perfect knowledge:
The buyers as well as sellers in the perfectly competitive market have perfect knowledge of the market conditions. Such knowledge will prevent the buyers from paying a higher price and a seller charging a different price than what is prevailing in the. market.
6. Single price:
In Perfect Competition all units of a commodity have uniform or a single price. It is deteriniried by the forces of demand arid supply.
7. Perfect mobility of factors of production:
Under Perfect Competition the factors of production that is land, labour, capital and organisation, enjoy complete freedom to move from one place to another and from one occupation to another. This implies optimum use of each factor input which can be available easily to the producers. Thus they will not face any problem in production of any commodity.
8. No transport cost:
There is no transport cost under perfect competition. It is assumed that in perfect competition all the firms are close to each other. There will not be any difference in transport cost and price will remain uniform.
9. Non Government Intervention:
Laissez faire policy prevails under perfect competition which means there is no government intervention in respect of production, transportation price determination of goods etc.
After analyzing a11 the features of perfect.competition, it is clear that perfect competition is ideal form of market, but it is very difficult to realize the above conditions practically. Thus, perfect competition is an imaginary concept.
Profits:
1. Short-Run Profit
2. Long-Run Profit
1. Short-Run Profit: (within 1 year)
• Seller can not increase or decrease the price (Prices are fixed)
• Entry and exit are fixed
• To get equilibrium price
• Demand curve will remain same because Prices are Fixed
1. Normal profit:
It is that level of profit which is just sufficient to keep the firm in its present use. Normal profit is assumed to be an element of the ATC curve.
2.Supernormal profit ( or abnormal profit)
This is any profit made in excess of normal profit.
The definitions of supernormal and normal profit mean that profit on a diagram drawn by an economist shows supernormal profit only. Normal profit is included as an element of the ATC curve and arises where ATC = AR. Examine the following diagrams:
Pure Competition
Pure competition is a part and parcel of perfect competition. According to Chamberlin, "a market becomes pure when monopoly is kept away."
Pure competition has certain conditions of perfect competition. They are
1. Large number of sellers
2. Large number of buyers
3. Free entry and exist
4. Homogeneous product
5. Single Price
Price Determination under Perfect Competition
Equilibrium price: Equilibrium price is the price at which quantity demanded is equal to quantity supplied. The price of the product under perfect competition, is influenced by both buyers and sellers and equilibrium price is determined by the interaction of demand and supply forces. According to Marshall, demand and supply are like two blades of a pair of scissors. Just as cutting of cloth is not possible with the use of one blade, the equilibrium price of a commodity cannot be determined, either by the forces of demand or by supply alone. Both together determine the price.
We can study this with the help of the following table and graph.
Demand and Supply Schedule
Price (`) Per Unit | Quantity Demanded (Units) | Quantity Supplied (Units) |
5 | 100 | 500 |
4 | 200 | 400 |
3 | 300 | 300 |
2 | 400 | 200 |
1 | 500 | 100 |
Above table shows the effect of price on market demand and market supply. The table shows that when price of the commodity is ` 5, quantity demanded is 100 units and quantity supplied is 500 units. Since supply is more than demand, price falls to ` 4/- and ` 3/-, respectively and quantity demanded extends to 200 and 300 units whereas supply contracted to 400 and 300 units, respectively. It is seen that quantity demanded and that quantity supplied both are equal at ? 3 where quantity demanded is 300 units whereas quantity supplied is 300 units. Thus, ` 3 will be an equilibirim price.
If further price falls to ` 2 and ` 1, quantity demanded will expand to 400 and 500 units, respectively and quantity supplied will contract to 200 and 100 units respectively. Since demand is more than supply, competition among buyers will increase and price will rise up to ` 2 and `3. Thus equilibrium price will be ` 3 per unit because demand and supply both are equal at this price.
E : Equilibrium point
OP : Equilibrium price
OQ : Equilibrium quantity demanded and supplied
On the 'x' axis we measure quantity demanded and quantity supplied and on the 'y' axis we measure price of the commodity. In the above diagram 'DD' is a downward slopping demand curve indicating inverse relationship between price and quantity demanded. 'SS' is an upward slopping supply curve indicates direct relationship between price and quantity supplied. Both the curve intersects each other at point 'E'. At this point the equilibrium price is ` 3/- and equilibrium demand and supply is 300 units.