Perfect Competition

1.Large Number if Buyers and Sellers & Homogeneous

Products

Hello viewers, today we are going to discuss about the

features of the perfectly market structure. In our previous
session , we have learnt about the types of market , forms
of market and what are the concept of average costs and
average revenue etc., Now we will discuss in detail what
is meant by a perfectly competitive market structure.
There are various features in order to differentiate
between a type of market. And basing on the type of
product also we will decide which type of product is
perfectly market or which market is monopolistic
competitive in nature, which type of market having a
monopoly etc.,. Now we will see perfectly competitive
market and what are the features that are involved in this
type of market structure. That means, when we will say
that market is perfectly competitive. for example,
Agricultural products are having a perfectly competitive
market structure. First in our previous session, we learnt
about what is meant by market. Market is the place,
where there is a large number of buyers and sellers
selling various types of products. Here, in a perfectly
competitive market structure, there are certain
conditions, which have to be satisfied. Now, we will see,
what are the conditions, when we will say that this type
of market is perfectly competitive market .
A perfectly competitive market is one in which all
the firms sells their products without influencing the

price of the product because the price of the

product is determined by market supply and
demand conditions.
First and the foremost important characteristics
feature of a perfectly competitive market is the price,
Price plays a very important role in the market. That is
here in a perfectly competitive market, any seller
cannot influence the price of the product. If all the
sellers sell the product sale the product at the same
price that is given price, then we say that it is perfectly
competitive market, For example, if we take the
agriculture product like Paddy , Wheat, Rice etc, all the
produce is sold at a same price. That means, the
producer cannot influence the price of the product. He
can sell any amount of product at a given price., this is
the fundamental feature of a perfectly competitive
market structure. Apart from these features, there are
various other features where we can call it as a
perfectly competitive market and the important
characteristics feature of a perfectly competitive
market is that
Characteristics features of a perfectly competitive
market are
Both buyers and sellers are price takers.

The number of firms is large.

There are no barriers to entry and exit.

The firms products are identical

There is complete information: about the market

There should be large number of buyers and sellers. This is

common feature for all the market structures, but in certain
type of market, that is there is only one seller. Where as in
Perfect competition , you have so many sellers as well as the so
many buyers at the same. So, the seller will sell the product at
a given price.He cannot influence the price.and another
characteristics feature is that free entry and exit of firms that
means, I told you in the previous session that the market is
where there are so many sellers, that means any firm that
means any individual company enter into the industry do the
business and can leave the industry. That means, Industry is
the combination of various companies or a firm whereas an
individual can come into the industry operate and can leave
the industry if he feels that he is making the losses, agriculture
sector is treated as an industry .Each individual company can
come and produce in the industry if he feels that he is making
losses he can leave the industry, because here the important
feature is price rigidity that means he cannot influence the
price, if the producer feels that he is making losses he can
leave the industry so free entry and exit of firms is another
important characteristics feature in the perfectly competitive
structure. So, here there are no entry were held. Now, we will
see another important characteristics feature under perfect
competition is products are homogeneous, that means all the
products are identical here, in the sense, here the product
homogeneity means you cannot differentiate between the
products which are selling in the industry, the produce that
produced by each company or each firm who are operating for
this particular industry produces the same identical product, if
you take out the company name also, you cannot differentiate
which company produced or which firm has produced such
product that type of homogeneity has to be maintained When
there is product homogeneity, the customers or the
consumers can feel that there is not a much of difference

among the produce sold by the firm A or the produce sold by

the firm B. There is no distinction is here, so where there is
price rigidity, because the price rigidity the customers here of
all the products having the same prices, all the products are
very similar and so there is not much of difference among the
products, so this is the perfectly competitive market structure.
There is a another important characteristics feature is , there
is completer information, that means all the producers as well
as sellers that means buyers and sellers will have a complete
information about the market structure. That means
information about the price .When there is any change in the
price, that is applicable to all the firms in the industry , so the
industry will come to know the changed price, or the changed
decreased price or about the new product or the information
relating to the market is very well known before the firm
operating in the industry as well as customers who are in the
industry. So, in this perfectly competitive market structure,

1. Both buyers or sellers are price takers- that is a price

taker is a firm or individual who takes the price
determined by market supply and demand as given
2. The number of firms is so large-any one firms output
compared to the market output is imperceptible and what
one firm does has no influence on other firms.
3. There are no barriers to entry- barriers to entry are
social, political, or economic impediments that prevent firms
from entering a market
So, here, as we have discussed that the price rigidity is
prevailing and firms are so large and there is no entry barriers
to the firm enter into the industry, Here another important
point is that what determines the output in the market, the
price is given to the individual firms then that is determined
by the demand and supply of the market condition. that is
market demand and market supply determine the price and

out put conditions in the market. when there is an equilibrium

between demand and supply of the produce there will
determine the output and price in the market, then what is
meant by the demand here .or have a idea about what is
demand. What is demand means, the amount of output sold at
given price is known as demand, then what is supply, the
amount of output that is sold at a given price is known as
supply, so when both the supply and demand are equal at a
point, then we will determine the output, the given output and
the given price that is sold in this type of market for a
particular type of product. Now, another important feature of
perfectly competitive marketer
4. The firms produces identical products this requirements
is that, each firms output is indistinguishable from any
other firms output
5. There is complete information- all consumers know all
about the market such as prices, products and available
technology.
6. Selling firms are profit-maximizing entrepreneurial firmsfirms must seek maximum profit.

2.Perfect mobility of factor of Production & Free Entry and Exit

of Firms

Here, as I have discussed all the producers produces similar

products, identical products means, homogenous products,
they have to produce. The complete knowledge or information
of the price prevalent in the market, the type of product is sold
is determined. Selling, so if the firm wants to make a maximum
number of profits, the number of products sold by individual
firms should be maximum, because here the important feature
is that the price rigidity is prevalent .He cannot or individual

firm cannot increase thee price in order to make more profit.

What he can do is, he can maximize the selling output in order
to maximize the profits. Only condition is using the maximize
the profits here. How is the shape of the demand curve so,
generally the shape of the demand curve means, here we are
discussing about demand curve is sloping down the curve that
means if the producer has to sell more, he has to decrease the
price of the products, suppose if the producer wants to sell
more of output he has to decrease the price, if he wants to sell
less of the product, he can increase the price, that means, there
existence, inverse relationship between the demand and price,
but here, we have an important characteristics of feature of
price rigidity, then what determines the demand? How will be
the shape of the demand curve? Here in this perfectly
competitive market, the demand curve is horizontal to X-axis:
The demand curves facing the firm is different from
the industry demand curve

A perfectly competitive firms demand schedule is

perfectly elastic even though the demand curve for
the market is downward sloping.

So, the demand curve, even though the entire market

demand curve is downward sloping, each individual
firm demand curve is perfectly elastic and it is
horizontal to -axis, because at given price he can sell
any amount of output, if you take demand on Xaxis
and price on Y-axis the demand facing the individual
demand of a firm is perfectly elastic is downward
towards the X-axis.

 The result is that the individual firm perceives

the demand curve for its product as being
perfectly horizontal

So, if you see in the diagram here as I have

explained you that the demand curve is slope
downwards, if you take quantity on X-axis and
price on Y-axis, it means that there is a inverse
relationship between demand and price. And then
by looking at the diagram, the market supply is an
upward slope, that means, there exists direct
relationship between the price and supply, at
higher price more is supplied into the market,
because supply
is the producers concept,
whereas
Demand
is an consumers concept. Every
consumer tries to purchase more at a lesser
price, whereas every producer tries to sell more
at a higher price. Then, there is a point of
equilibrium .What Price is determined in the
market, which price at a point is feasible both to
the consumer as well as to the producer, so that
is determined
at the point of intersection
graphically through the intersection of demand
and supply, that is if you look into the diagram,
that is. Between six rupees and eight rupees , is
the Price that can be evenly given in the market
because at this there both the demand curve as
well as supply curve are intersecting at this
point, and if you take it to extend the line for
individual firms in the graph, you can see the
demand curve as we have discussed, which is
horizontal and parallel to X-axis, which means
that any amount of commodity an individual can

firm can sell that is seven rupees given to the

firm, where we can sell any amount of quantity in
the market that is he can sell 10 units, 20, 30 and
40 and he can extend , any number of units that
he can sell only at the given price that is
Around Seven rupees between six to eight rupees
, he can sell any amount of output in the market.
So, this is an important characteristics feature
again for a perfectly competitive market
structure.
3.Perfect Knowledge
Intervention

&

No

Government

Now we will see what is the supply in the

perfectly competitive market.

These strong six conditions are seldom met

simultaneously, but are necessary for a
perfectly competitive market to exist

That means, what all the six characteristics

features that where have discussed that is price
rigidity, large number of buyers and sellers that
exist in a market, free entry or exit of firm ,
product homogeneity or all characteristics
meeting at a point is very difficult have to be met
to say that market is a perfectly competitive. All
these six characteristics are not prevailing, we
cannot say that the market is
perfectly
competitive market. That characteristics features
may be similar to other type of market structure,
but the market should be perfectly competitive

market. Any of these characteristics should be

satisfied. And now,

Supply is a schedule of quantities of goods that

will be offered to the market at various prices.

As I have shown you in the graph, that supply is

at the amount of output that can be sold in the
market at various price level .If you con struct a
graph that driven upward sloping one.

When a firm operates in a perfectly

competitive market, its supply curve is its
short-run marginal cost curve above average
variable cost
So, this average variable cost and average cost we
have discussed in the previous session. That is
what is meant by average cost. The total cost is
the average cost divided by the number of What
is average cost? In the
Average cost two
components, we have two components that is
fixed cost and the variable cost. When we
discussed about the costs restructures , we have
discussed about the fixed costs and variable costs
so it should be short-run supply is average
variable costs. Here, we have not considered the
fixed costs, because fixed costs are constant
throughout the production process.
Market Supply and Demand and Single-Firm
Demand:

That means, we have

discussed
the
characteristics feature of the firm which are very

common, If we will take an individual firm or

company and see how market supply condition.
Now, we are taking example for a corn It is called
as an agricultural product, I told you in the
beginning that perfectly competitive market
structure is more applicable and suitable to agrobased industry, because in the agro-based
industry, the products that are produced are very
similar and identical, we can apply these
characteristics features to agro-based industry.
Now,
we are taking an example of corn
production here, Iam showing the demandmarket supply, How the individual firms rise
here, If you see in the graph, red-line indicates
demand and blue-line indicates supply curve,
both are intersecting at one-rupee, and the
quantity that is supplied in the market by the
producer and the quantity demanded in the
market by the consumer, is 20 billions, the price
prevailing in the market is one-rupee, If we
extend the line Individual Firm producer is doing
and if he is able to sell any amount at an output at
a given one-rupee, that is given in the diagram D
in Individuals firm diagram. Selling of the
product in the market has various type of time
taken. That is , we have divided here, the entire
time period into Very-short period, Short
period and Very long period.
The market period depends upon the type of
product
If the product is the perishable commodity, that is
very short run period. And if the product is not a
perishable product, it is having a very-short

period and as well as a Very-long period .Finally,

we are retreating to the Short-run , Long-run and
Very short run period .In the short run, there is
possibility for the firm to make
Profit, In the very short run also it makes more
profits, it maximizes more profits compare to
short run. In the long-run there is no chance for
any firm to make a profit., because, what happens
in reality, because in the industry, there are so
many firms are operating. Suppose, in the short
run if it is observed that this industry particularly
industry, the agro-based industry is making
maximum profits. What happens is that because
of the important characteristics feature of free
entry and exit of firms in the industry, the other
companies already operating, producing other
type of products. Can feel that the agro-based
industry business will give maximum profits
immediately they can and start producing the
products. What happens in the long-run, this
takes long time. so, in the long run what happens
is that for example if there are only five market
player in this type of industry, by observing that
this industry is making more profits, maximum
profits, the number of market players may
increase in the long-run. Automatically the
market is shared among ten people, previously it
is shared among five people because of observing
this industry is making maximum profits, new
firms automatically enter and entire market is
being shared. When the market is shared among
the Ten individuals instead of Five individuals
firms, automatically, the profits will also gets

shared, the amount of profit share is decreased

and even profit maximization also decrease