PERFECT COMPETITION

 Perfect competition
 ■ Perfect competition refers to market situation where
there are very large number of buyers and sellers dealing
in a homogeneous product at a price fixed by the market.
 ■ In the perfectly competitive market, sellers sell a
homogeneous product at a single uniform price. This price
is not determined by a particular firm but by the industry.
 ■ Example:
 ■ In reality, perfect competition has never existed. The
closest example we may have for such kind of market can
be market for agricultural goods(like wheat and rice).in
case of wheat there are numerous buyers and
sellers(farmers).As a result, no single buyer and
seller can significantly affect the market price of
wheat.
FEATURES OF PERFECT COMPETITION:
1.Very large number of buyers and sellers –
In a perfectly competitive market , there are very large
number of buyers and sellers.
■ Implication of very large number of buyers and sellers
is that the number of sellers is so large that the share of
each seller is insignificant in the total supply.Hence,an
individual seller cannot affect the market price.Similiarly,a
single buyer’s share in total purchase is so insignificant
because of their large numbers that an individual buyer
cannot influence the market price.
■ Under such conditions, price of a commodity is
determined by the market forces of demand and supply
and each buyer and seller has to accept the same price.
As a result, uniform price prevails in the market.
2.Homogeneous product-
■ The products offered for sale in the market are
homogeneous that is the product sold is identical in all respects
like size, shape, quality, colour etc. Since each firm produces
identical products, their products can be readily substituted for
each other. So, the buyer has no specific preference to buy
from a particular seller only.
■ Implication of ‘Homogeneous Product ‘ is that buyers treat
the product as identical. Therefore the buyers are willing to pay
only the same price for the products of all the firms in the
industry.it also implies that no individual firm is in a position to
charge a higher price for its product. This ensures uniform
price in the market.
■ 3.Freedom of entry and exit:
■ Every seller has the freedom to entry or exit the industry.
There are no artificial or natural barriers for entry of new
firms and exit of existing firms.it ensures absence of
abnormal profit and abnormal losses in the long run.
■ Implication of ‘Freedom of entry and exit ‘is that all firms
will earn only normal profit in the long run. A firm can earn
abnormal profits or losses in the short run as firms are not
in a position to enter or leave the industry.
■ But ,in the long run, any abnormal profits, induces new
firms to enter the market. It increases the total supply and
reduces the market price. This trend continues till profits are
reduced to normal . Similarly , abnormal losses lead to exit
of existing firms , which reduces the total supply . It leads to
rise in price till the losses are wiped out.
4.Perfect knowledge among buyers and sellers:
Perfect knowledge means that both buyers and
sellers are fully informed about the market price.
Its implication is that no firm is in a position to
charge a different price and no buyer will pay a
higher price. As a result a uniform price prevails in
the market.
Both buyers and sellers have perfect knowledge
about the product market. Sellers also have perfect
knowledge about the input markets,i.e.each firm
has an equal access to the technology and the
inputs used in the production. As a result, all the
firms have a uniform cost structure . Since, there is
uniform price and uniform cost in case of all the
firms,all the firms earn uniform profits.

5.Perfect mobility of factors of production:
The factors of production (land,labour,capital
and entrepreneurship) are perfectly mobile.
There is no geographical or occupational
restriction on their movement. The factors are
free to move to the industry in which they get
the best price.
 6.Absence of transportation costs: In order to
ensure uniform price in the market, it is
assumed that transportation costs are zero. A
producer can sell his product at any place and
a buyer can buy it from the place he likes.
7.Absence of selling costs:
Selling costs refers to cost of advertisement of
the product. In perfect competition, there are
no selling costs because of perfect knowledge
amongst buyers and sellers.
 UNDER

PERFECT COMPETITION
 Supply curve indicates the relationship
between price and quantity supplied. In other
words, supply curve shows the quantities that
a seller is willing to sell at different prices.
 According to Dorfman, “Supply curve is that
curve which indicates various quantities
supplied by the firm at different prices”. The
concept of supply curve applies only under
the conditions of perfect competition.
 Long run supply curve can also be analyzed
from firm and industry’s point of view:
 1. Long Run Supply Curve of a Firm:
 Long run is a period in which supply can be
changed by changing all the factors of
production. There is no distinction between
fixed and variable factors. In the long run,
firm produces only at minimum average cost.
In this situation, long run marginal cost,
marginal revenue, average revenue and long
run average cost are equal i.e., LMCMR (=
AR)LAC (minimum). The firm is enjoying only
normal profits.
 So that position of marginal cost curve will
determine the supply curve which is above
the minimum average variable cost. The point
where minimum average cost is equal to
marginal cost is called optimum production.
Thus Long Run Supply Curve of a firm is that
portion of its marginal cost curve that lies
above the minimum point of the average cost
curve.
 In figure 2 the firm is in equilibrium at point E
where MRLMC (=AR). AC is minimum
corresponding to this point. This point E is also
called optimum point because at this point
MR=LMCAR minimum LAC. That portion of
LMC which is above E is called long run supply
curve.
 2. Long Run Supply Curve of an Industry:
 In the long run, industry’s supply curve is
determined by the supply curve of firms in the
long run. Long run supply curve in the long run
is not lateral summation of the short run
supply curves. Industry’s long run supply curve
depends upon the change in the optimum size
of firms and change in the number of firms.
 It is on account of two reasons:
 (i) In the long run, firms continue to enter into and exit
from the industry,
 (ii) Firms get economies and diseconomies of scale. This
displaces the long run marginal cost (LMC).
 Due to these reasons, long run supply curve of industry is
not the lateral summation of supply curve of firms. In
reality, long run supply curve of industry can be known
from the long run optimum production of firms multiplied
by the number of firms in an industry.
 LRSi, = Q x N
 Where LRS1 is long run supply curve of industry. Q is the
optimum output of a firm and N, the number of firms.
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