Perfect competition is 1 of the form of the market. There are 2 types of market:
- Perfectly competitive market or Perfect Competition or Perfect Market.
- Imperfect competition.
In this post, we will learn about perfect competition in an easy way. Let’s learn.
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What is Market?
Market means a place where the buyers and sellers of a commodity, they come in contact with each other to perform a transaction related to the purchase and sale of a commodity.
Perfect competition is a type of market situation in which buyers and sellers operate freely and a commodity is sold at a constant or uniform price.
In this type of market, there are large number of buyers and sellers.
All firms in this type of market produces homogeneous (same) and undifferentiated goods.
Each buyer and seller in this type of market is “PRICE TAKER”.
Features of Perfect Competition
1. There are a very large number of buyers and sellers
Under perfect competition, there is a large number of buyers, each demanding a small part of the total market supply of the product.
As a result, no single buyers are in a position to influence the market price determined by the forces of the market demand and market supply.
2. All the firms are selling a homogeneous product
In this market, all the firms produce and supply identical products.
It means that the products of all the firms are perfect substitutes for each other.
As a result, the price elasticity of demand for the firm product is infinite.
3. There is free entry and exit of the firm
In a perfectly competitive market, there are no restrictions on the entry of the new firm into the market or even on the exit of existing firms from the market.
4. Both buyers and sellers have perfect knowledge about the product
In this market, the firms and the buyers possess perfect information about the market.
It implies that no buyer is ignorant about the price prevailing in the market.
5. Perfect mobility exists
There are no restrictions on the movement of goods and there is no transportation cost involved.
In perfect competition, the factors of production are completely mobile leading factor price equalisation throughout the market.
Demand & Revenue Curves Under Perfect Competition
Demand/ Average Revenue/ Marginal Revenue/ Price
Perfect competition have perfectly elastic demand curve.
Under this market form, homongeneous goods are produced. So, price always remains constant which makes the demand curve perfectly elastic.
Also, Price = AR, so it means AR curve also remain constant. MR is also same, as there are no changes in prices.
Demand Curve = AR = Price = MR. As shown below:
TR curve under Perfect Competition
Under perfect competition, as the prices are fixed by the industries, the TR curve is upward sloping. As shown below:
Equilibrium Under Perfect Competition
Under perfect competition, the industry is the price maker and the firm is the price taker.
Since in this market form homogeneous goods are produced. So, industries cannot charge different prices from different firms.
The industry will decide the price for the firms. Firms will accept that price, where industry reaches an equilibrium point, that is, the demand curve is equal to the supply curve.
In the given diagram, price, revenue measures on the Y-axis, and the units of a commodity are measured on X-axis.
Industry reaches equilibrium at point E, and the final price decided is 6. Firms will charge price 6, irrespective of the quantity sold.
You can read the related concepts:
- The price elasticity of supply
- The supply curve
- What is production function?
- Terms related to production concept
- Law of diminishing returns to a factor
- Total cost, Total variable cost and Total fixed cost
- The relation between TC, TVC and TFC
- Average total cost
- The demand curve
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