PERFECT COMPETITION

Lecture on: (a) Features of Perfect Competition (b) Price and Output Determination

B.TECH, (CSE) Managerial Economics and Financial Analysis 11-2-2013

Features of Perfect Competition:

Large number of buyers and sellers Homogenous products and services Free entry and exit Perfect information about market condition Perfect mobility of factors of production Uniform price level No transport cost Difference between firm and industry

PRICE OUTPUT DETERMINATION IN PERFECT COMPETITION

Prices are determined by demand and supply forces The price and output are determined at the point where the demand and supply both are equal under perfect competition This can be understood by taking an example and plotting it on the graph

EXAMPLE AND DIAGRAMATIC EXPLANATION

PRICE (Rs)
5.00 4.00 3.00 2.00

DEMAND
200 300 400 500

SUPPLY
600 500 400 300

1.00

600

200

Diagrammatic Explanation:
Y AXIS

P R I C E
0

D E

D
X AXIS

OUTPUT

Price and output determination when

demand changes and supply remains constant Y axis
D1 S

P1 P D2 P2 S

D E

E1

D1 E2 D D2

0 M2 M M1

Price and output determination when demand remains constant and supply changes
Y axis D S2

P1 S2 P S P2

E2 S E S1 E1 S1

Price and output determination when both demand and supply are changed

Y
D D1
S2
E2 E
D2

p R I C E

S
E1

S1

S
S2 D2

S1

D1

0 M2 M M1 X