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Thursday, 5 May 2011

Perfect Competition and its Assumptions and how price is determined under perfect competition

PERFECT COMPETITION :- By perfect competition we mean when the same price of a commodity prevails during a particular period in the market.

IMPORTANT CONDITIONS OF PERFECT MARKET

1. LARGE NUMBER OF BUYERS :- In a perfect market there are a large number of buyers. Each buyer can not affect the market price because each firm produces a small quantity.

2. LARGE NUMBER OF SELLERS :- There should be a large number of sellers of a particular commodity, and no any single seller may affect the market price of the commodity.

3. PERFECT KNOWLEDGE :- The buyers and sellers must have a perfect knowledge of the prices prevailing in the market.

4. HOMOGENEOUS PRODUCT :- In a competitive market all the firms should sell homogeneous product. The buyers are not in a position to find the difference among the production of various firms.

5. NO ATTACHMENT :- In a perfect competition a consumer should not give importance to any particular producer. He should keep in view the price of the commodity.

6. PERFECT MOBILITY :- There should be no restriction on the mobility of factors of production. They can move from one sector to another.

7. ENTRY AND EXIT :- the firms are allowed to enter or leave the market, there is no prohibition.

8. CHANGE IN PRICE :- The price should be free to change in response to change in demand and supply conditions. No one should try to control the price changes in the market.

9. FREEDOM OF BUYING AND SELLING :- Another condition of perfect competition is that there should be no restrictions on the purchasing and selling of the products.

10. ABSENCE OF TRANSPORT COSTS :- If the same price has to rule, it is necessary that no cost of transport has to be incured. If the cost of transport is there, prices must differ in different sections of the market.

11. ROLE OF DEMAND AND SUPPLY :- In a perfect market total demand and total supply forces play very important role in the determination of price in the market.

12. DETERMINATION OF PRICE :- The quantity demanded and supplied vary with the price. When price rises demand falls but supply increases. At that price where demand and supply both are equal to each other, that price will be determined in the market. We can explain it by following table and diagram :


EXPLANATION :- When price per kd. is Rs. 6/- the demand and supply both are equal to each other (300) . So Rs. 6/- will be the price in the competitive market.


EXPLANATION :- According to the above diagram curve DD' shows the demand of sugar on various prices. Curve SS' shows the supply of sugar in the market. Both the curves intersect each other at the point K. So it is an equilibrium point.
Thus, the change either in demand or in supply will change the equilibrium price.

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