1. How do you explain perfect competition?

2. State the four time periods described by Marshall.

3.3 PRICE DETERMINATION UNDER PERFECT

COMPETITION

The forces underlying the determination of price under

perfect competition are demand and supply. As there is a single
price ruling in a perfectly competitive market the equilibrium price
is determined by the forces of demand and supply in the market.
The actions of individual buyers and sellers cannot influence the
market price. Though individuals cannot change the price, the
aggregate force of demand and supply can change the price. The
demand side is governed by the law of demand based on marginal
utility of the commodity to the buyers. The supply side is governed
by the law of supply and by the cost of production.

The price determined by the interaction of demand and

supply is called the equilibrium price. Literally, equilibrium means
balance. Thus, equilibrium price is a state from which there is not
tendency to move. At equilibrium price quantity demanded is
equal to the quantity supplied and it is at this price that the buyers
as well as sellers are satisfied.

The following hypothetical schedule (Table 3.1) and graph

Fig. 3.4 explains how price is determined under perfect
competition:

Table 3.1

Price (Rs.) Quantity Demanded Quantity Supplied (Units)

(Units)
50 100 500
40 200 400
30 300 300
20 400 200
10 500 100

In the above schedule when the price is Rs.50/- the

quantity demanded is only 100 units while the quantity supplied is
500 units. As price falls to Rs. 40/- the quantity demanded