Market and Perfect

Competition
 Market and Types of Market
Market : Market as complex set of activities by which

potential buyers and sellers brought in close contact for

the purchase and sell of a commodity.
Samuelson: A market is a mechanism by which buyers

and sellers interact to determine the price and quantity of

goods or services
A market can be regional, national, International
 Features of Market
Commodity
Buyers and sellers
Communication
Place or Area
Kind of commodity
Size of Production
Extent of the man
Other factors-Trade police of Government
 Classification of Market Structure

Perfect competition

Imperfect Competition
Monopoly

Oligopoly

Monopolistic Competition
 Perfect Competition
Perfect competition is a market structure characterized by

complete absence of rivalry among individual firms.

Perfect competition is defined as a market structure in
which there are large number of buyers and sellers of
homogeneous commodity. A good example of perfect
competition is the agriculture market. Otherwise, it is an
ideal situation which rarely exists in the real world.
Features of Perfect Competition

 Conditions of Pure Competition among the

producers.

 Conditions of Perfect market for the commodity.

Conditions of Perfect Competition

Pure Competition Perfect Market

 Large number of buyers and
sellers
 Homogenous product
 Free entry and exit of firms
 Perfect knowledge
 Perfect mobility of factors of
Production
 Absence of transportation
Cost
 Absence of selling Cost
Conditions of Pure Competition
Market Firm
Price Price
D
S
E P d
P

S D

O X Output Output
 Equilibrium Price
Equilibrium literally means a state of balance or rest or
position of no change. In economics, the term
equilibrium means the state in which there is no
tendency on the part of consumers and producers to
change. Two factors determining equilibrium price are
– demand and Supply.
 Thus, Equilibrium price is the price at which demand
and supply of equal to each other . At this price, there
is no incentive to change.
 Price Demand Supply (kg/month)
(Rs. /kg) (kg/month)

8 1 5

7 2 4

6 3 3

5 4 2

4 5 1
 Equilibrium Price
Price
S D
8

DD=SS
7

5
D
4 S

2
O 1 2 3 4 5
Demand and supply
 Short Run Equilibrium
In the short – term, there are some fixed factors and the

firm can expand its output by employing more variable

factors.
 it is more useful to analyze the equilibrium of the firm

with the marginalist principle ,i.e., marginal revenue

(MR)-marginal cost (MC) principle. The marginal
conditions are derived from the profit (π).
 Super Normal Profit
MC

P AC

B MR=MCe d=AR=MR
P
PROFIT
A c

O X Q
 Super Normal Profit
P=d=AR=MR= Demand curve d, facing the firm is indefinitely

elastic at the established market price OP. the demand curve is

also the AR and the MR curves under perfect competition.
 AC= Short-run average which is U- shaped reflecting the law of

variable proportions.
 MC= short-run marginal cost curve which is U- shaped and cuts

the AC in its minimum point. The U- shape of the MC curve

reflects the law of variable proportions
Long run Normal Price =Long run Minimum
Average Cost
LM LA
C C
PRICE/COST

P
D

O X
M
OUTPUT
 Summing Up

Price is determined by the interaction of the forces of

demand and supply. Equilibrium Price is established at

the level at which demand curve intersects the supply
curve, or at which the quantity demanded is equal to
the quantity supplied.
The element of time plays an important role in the

determination of price.
 Summing Up
Market price is the result of momentary equilibrium

between demand and supply.

Short-run price is the result of the equilibrium between

a given demand curve an d the short –run supply curve.

Long-run or normal price is the result of equilibrium

between a given demand curve and the long-run supply

curve, supply conditions having been fully adjusted to
the demand condition.