PERFECT COMPETITION
By Mohnish chhipa

INTRODUCTION
Perfect competition An industry structure in which there are many firms, each small relative to
the industry, producing virtually identical products and in which no firm is large enough to have
any control over prices. In perfectly competitive industries, new competitors can freely enter and
exit the market.
In other words, perfect competition describes markets such that no participants are large enough
to have the market power to set the price of a standard product.
The perfect competition serves as a benchmark against which we can measure real-life and
imperfectly competitive markets.
Homogeneous undifferentiated products; are products that are identical to, or indistinguishable
from, one another.

INTRODUCTION
A market structure in which the following five criteria are met:
1. All firms sell identical products.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices charged by each seller.
5. The industry is characterized by freedom of entry and exit.
Sometimes referred to as “pure competition”.

PERFECT COMPETITION
Determination of Market price
• Market price is determined by the equilibrium between demand and supply in
a market period or very short run.
What will be the nature of the supply curve in a Market period?
• Two cases are prominent;
• 1.Perishable goods
• 2.Non-perishable goods

PERFECT COMPETITON
Price determination of charitable goods
Here
MPS = market period
supply curve
DD = market demand
curve

PERFECT COMPETITION
SHORT-RUN PRICE DETERMINATION UNDER PERFECT
COMPETITION
The marginal cost curve shows the output
level that maximizes profit at any market
price. Thus, the marginal cost curve of a
perfectly competitive profit-maximizing
firm is the firm’s short-run supply curve.
This is true except when the price is so low
that it pays a firm to shut down.

ADVANTAGES AND DISADVANTAGES OF
PERFECT COMPETITION
Advantages
Optimal allocation of resources:
Economic efficiency
Maximization & effectiveness of utility, and service.
The competition encourages efficiency:
Tight competition between buyers.
Buyers get efficient as they embrace change in the competitive
market.
Customers Benefit:
 Low price of products.

ADVANTAGES AND DISADVANTAGES OF
PERFECT COMPETITION
Disadvantages
Less profit:
Cost of participating in the competition.
Profit vs investment.
Diversity of Products:
Width & Depth of brands &products.
Cost involved in developing and launching new products or
service.
Limitations of presentation:
Product designs,
Product Specifications

IS PERFECT COMPETITION REALISTIC?
• Assumptions the market must satisfy to be perfectly competitive are rather restrictive.
• In the vast majority of markets, one or more of the assumptions of perfect
competition will, in a strict sense, be violated
• Perfect competition can approximate conditions and yield accurate-enough
predictions in a wide variety of markets

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