Perfect Competition

What is Perfect Competition? Learn Perfect Competition in detail in our article.

If 3 conditions are fulfilled it is regarded as perfect competition.

{1} Large number of buyers and sellers

{2} Homogenous product

{3} Free entry & exit

As stated above that there should be a large number of buyers and sellers So, that no single seller or buyer can influence the price.

• Perfect knowledge: In perfect competition buyers & sellers have full knowledge about price, supply & other market conditions
• Uniform rate: Seller have to accept price decided by industries

# Firms are the price taker.

# industries are the price maker.

Perfect competition is a hypothetical condition however it may be found in

• Stock exchange
• Grains market

Notes from the graph:-

{1} In perfect competition AR= MR= P= DC

Here AR = Average revenue

MR= Marginal revenue

P = Price

The AR curve is also known as the demand curve.

{2} Industry Demand curve

Downward / Negatively sloped

Firm’s demand curve: Horizontal

• Firm’s Equilibrium

Under perfect competition, a firm is said to be in equilibrium, At the level at which,

It is earning maximum profit OR minimum loss

Firm’s equilibrium point: –

{1} MC =MR

{2} MC cuts MR from below. {see in the above figure MC curve cuts MR curve at point T and R both but equilibrium point will be considered at R because there MC curve is cutting MR curve below.}

Situation faced by Perfect competition firm :-

{1} Short Run

• Super profit [if AR > ATC]
• 
• Normal profit [if AR= ATC] ~ No profit & loss

It is Break Even point.

Here, Firm is called marginal firm.

• Loss [if AR<ATC]

{2} Long Run

→ Only normal profit

→ in long run perfect competition firm earns only normal profit because of Free entry & Exit.

Here, Fig (I) shows that if Firm is earning super profit more firm will come, supply will increase. So, the price will reduce.

Fig (ii) shows that if the firm is incurring loss many firms will exit. Hence supply will decrease. So price will increase.

the condition for the long run equilibrium of the firm is that the marginal cost should be equal to the price and long run average cost  I.e LMC = LAC =P

The firm adjusts its plant size so as to produce that level of output at which the LAC is the minimum possible .

Long Run of the Industry

In Long Run AR = MR =LAC = LMC at E1 . Since E1 is the minimum point of the LAC curve the firm produces equilibrium output OM at the minimum cost.

Conditions associated with the Long-run equilibrium of the industry:–

• The output is produced at minimum feasible cost.
• Consumers pay the minimum possible price which just covers the marginal cost I.e MC =AR
• Plants are used at a full capacity in the long run So that there is no wastage of resources i.e MC = AC
• Firmsearns only normal profit.
• Firms maximize profits (I.e MC =MR ) but level of profits will be just normal .

In other words in the long run,

LAR = LMR = P = LMC = LAC and there will be optimum allocation of resources.

 
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