price determination under perfect competition

How is the price and output of a firm and industry determined under perfect competition?

Ans:-

Meaning of perfect competition:- Perfect competition is that market where there are a large number of buyers and large numbers of sellers available to sell and purchase homogeneous products.

In other words:- It is a location where homogeneous products are dealt by many buyers and sellers. Individual sellers have no control over the price in perfect competition.

Features of Perfect Market

• Large number of buyers and sellers
• Homogeneous Products
• Free entry and exit
• Perfect knowledge
• Same price
• No advertise cost

Meaning of Firm:- It is an enterprise unit engaged in the production for sale with the objective of maximizing the profit.

Price determination under perfect competition by firm

As we know that in the perfect competition no one firm has control over the price in the market to sell its products. So every firm is bound to take price whatever is prevailing in the industry market. So in the perfect market price is determined through the demand and supply of products. price determination under perfect competition

In other words “Firm is price taker not a price maker”.

Every firm is a part of an industry so whatever price is determined in the industry, firms have to take the same price. Such price is determined with the force of supply and demand of goods in the market. Thus individual firms cannot determine the price in perfect competition.

Meaning of industry:- It involves many firms which produced homogeneous products in the market called industry.

So Industry is a price maker.

Price determination under perfect competition in industry

Price of a commodity is determined by industry and not by any one, a firm or seller. Aggregate of all firms is known as industry. price determination under perfect competition

Price of the commodity is determined by the industry at which point “where Market demand for the commodity is equal to aggregate supply by the industry”

In simple words, “Equilibrium of price is determined at that point where total demand is equal to total supply.

However we can understand the price determination under the perfect competition concept with the following example. price determination under perfect competition

Table indicate following data

1. Table tells us that at the highest price ₹5 per dozen, and supply is 50 dozen but demand is only 10 dozen.
2. As we know that suppliers will be more supplied at the highest price.
3. But demand will be less at the highest price.
4. This is due to the competition among the homogeneous products.
5. Thus supply is more than demand.
6. But when prices fall, supply also declines but demand will rise.
7. As when price falls upto ₹ 3 from ₹5. Then demand will rise and demand supply will be in equilibrium.
8. If more prices decline as ₹2 then demand will be increased. Due to the competition among buyers. price determination under perfect competition

Now we can understand through Figure

1. Good units are shown on the x axis and the price shown on the Y axis.
2. DD is the demand curve and it slopes downward from left to right.
3. In which DD shows us that when price rises, demand falls. As when price ₹5 then demand upto 10 units.
4. When price decreases from ₹5 to ₹1 then demand increases upto 50 units.
5. So relation of demand curve is negative with the Price.
6. SS is the supply curve.
7. It slopes upwards from left to right.
8. SS curve shows us that when price is high as ₹5 then supply also is high in the industry. When price declines upto ₹1 then supply also decreases upto 10 units.
9. In addition, supply curve relation with price is always positive.
10. DD and SS intersect each other at point E.
11. In other words supply and demand are equal at E point.
12. Thus at Point E will be equilibrium Price as ₹3.
13. So price under perfect competition is determined where Demand and Supply curves cut each other.

It is clear from the figure that Every Supplier would like to supply at the highest price for the purpose of maximizing profit. price determination under perfect competition

But Every customer would like to purchase more at a lower price. So these competitions remain in the perfect market. price determination under perfect competition

As we know in a perfect market there are many firms for homogeneous products which alone cannot determine the price of a product in a perfect market. But according to the industry in which supply and demand will adjust itself. And the price of a commodity will be determined by itself where equilibrium will be established through demand and supply. You can check the syllabus of business economics under BCom-ll on the official website of Gndu. price determination under perfect competition

Conclusion:- At last we can say that demand and supply intersects each other at that point where equilibrium will be established. No single firm can determine the price of a commodity. Thus, price will be determined as per the industry supply and demand in the perfect market. Now we are able to understand price determination under perfect competition. price determination under perfect competition.

Important questions of Business Economics

1. Law of variable Proportion
2. Law of Return to scale

Price determination under perfect competition