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Economics Forms of Market

Perfect competition is a market structure with many buyers and sellers trading a homogeneous product, where no single entity can influence market prices. Key features include free entry and exit of firms, perfect knowledge, and perfectly elastic demand, leading to price determination through market equilibrium. In the short run, firms maximize profit where marginal revenue equals marginal cost, while in the long run, only normal profits are sustained due to market dynamics.

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10 views4 pages

Economics Forms of Market

Perfect competition is a market structure with many buyers and sellers trading a homogeneous product, where no single entity can influence market prices. Key features include free entry and exit of firms, perfect knowledge, and perfectly elastic demand, leading to price determination through market equilibrium. In the short run, firms maximize profit where marginal revenue equals marginal cost, while in the long run, only normal profits are sustained due to market dynamics.

Uploaded by

sri.kashish1706
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Class 11 Microeconomics: Notes on Perfect Competition (Chapter: Forms of Markets)

1. Introduction to Perfect Competition

Perfect competition is a market structure characterized by a large number of buyers and


sellers dealing in a homogeneous product. No single buyer or seller has the power to
influence the market price. It represents an ideal form of market structure.

2. Features of Perfect Competition

(i) Large Number of Buyers and Sellers

 There are many buyers and sellers in the market.


 Each seller’s contribution to the total market supply is so small that individual actions
cannot influence the market price.
 Example: Agricultural markets like the wheat or rice market where farmers sell
identical crops.

(ii) Homogeneous Product

 All firms sell an identical product, ensuring no differentiation in quality, features, or


branding.
 Buyers are indifferent to the seller from whom they purchase the product.
 Example: Salt, where every brand tastes and functions the same.

(iii) Free Entry and Exit of Firms

 Firms can enter or leave the industry freely without restrictions such as high costs or
regulations.
 In the long run, this ensures that firms earn only normal profits.
 Example: A small bakery can open or close its business based on profitability without
major legal or financial barriers.

(iv) Perfect Knowledge

 Buyers and sellers have complete information about prices, costs, and market
conditions.
 This prevents exploitation and ensures fair competition.
 Example: A farmer knows the prevailing market price for wheat and sells
accordingly.

(v) Perfect Mobility of Resources

 Factors of production (land, labor, capital) can move freely from one firm to another
or from one industry to another.
 This ensures that resources are used efficiently.
 Example: A laborer can switch from working in a sugarcane field to a wheat field if
wages are better.
(vi) Price Taker

 Individual firms and buyers accept the market-determined price as given.


 Firms cannot influence the price as the total supply by one firm is negligible
compared to the market supply.
 Example: If the price of potatoes is fixed at ₹20 per kg in the market, a single farmer
cannot sell at ₹22.

(vii) No Transportation Costs

 Transportation costs are either negligible or non-existent in perfect competition.


 All buyers and sellers are assumed to operate in close proximity.
 Example: In a village market, farmers sell their goods directly to buyers without
significant transportation costs.

(viii) Perfectly Elastic Demand

 The demand curve faced by an individual firm is perfectly elastic (horizontal) at the
prevailing market price.
 This implies that the firm can sell any quantity of the product at the given price.

Graph: A perfectly elastic demand curve faced by an individual firm:

Price (P)
| -----------
| |
| |
|_______|_________________________________________ Quantity (Q)
Market Price

Example: If the market price of milk is ₹50 per liter, a seller can sell any quantity at this
price but cannot charge more.

3. Price Determination under Perfect Competition

Market Equilibrium

 The price in a perfectly competitive market is determined by the interaction of market


demand and market supply.
 Equilibrium Price: The price at which the quantity demanded equals the quantity
supplied.

Graph: Market equilibrium with demand and supply:

Price (P)
| /
| / \
| / \
|___/__________________ Quantity (Q)
Equilibrium
Firm’s Demand Curve

 A firm under perfect competition is a price taker.


 Its demand curve is perfectly elastic (horizontal) at the market price.

4. Revenue Analysis in Perfect Competition

(i) Total Revenue (TR)

 Total revenue is the total earnings of a firm from the sale of a given quantity of goods.
 Formula: TR = Price × Quantity Sold
 Example: If the price of a product is ₹10 and the quantity sold is 50 units, then:
o TR = 10 × 50 = ₹500

(ii) Average Revenue (AR)

 Average revenue is the revenue earned per unit of output sold.


 Formula: AR = TR ÷ Quantity Sold
 In perfect competition, AR = Price because the price remains constant.
 Example: If the TR is ₹500 and 50 units are sold, then:
o AR = 500 ÷ 50 = ₹10

(iii) Marginal Revenue (MR)

 Marginal revenue is the additional revenue earned by selling one more unit of output.
 Formula: MR = Change in TR ÷ Change in Quantity
 In perfect competition, MR = Price because each additional unit is sold at the same
price.
 Example: If TR increases from ₹500 to ₹520 when the quantity sold increases from
50 to 52, then:
o MR = (520 - 500) ÷ (52 - 50) = ₹10

Graph: Relationship between TR, AR, and MR:

TR Curve:
TR rises as output increases and is linear due to constant price.

AR and MR Curve:
Price (P)
| -----------
| |
| |
|_______|_________________________________________ Quantity (Q)
AR = MR = Price

5. Profit Maximization in Perfect Competition

Short Run
 A firm maximizes profit where MR = MC (Marginal Revenue = Marginal Cost).
 If MR > MC, the firm increases output.
 If MR < MC, the firm decreases output.
 Graph:

Price (P)
| /\
| / \
|_______/____\____________________ Quantity (Q)
MR=MC (Profit Maximization)

Long Run

 In the long run, firms earn only normal profits as free entry and exit ensure no
supernormal profits or losses.
 Example: If a bakery earns abnormal profits, new bakers enter the market, increasing
supply and lowering the price until only normal profits remain.

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