How is the price and output of a firm and industry determined under perfect competition?
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.
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 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 how price determination under perfect competition concept with the following example.
|Price per Unit ( ₹ )||Supply of goods-X in Dozen||Demand for good-xIn dozen|
Table indicate following data
- Table tells us that at the highest price ₹5 per dozen, and supply is 50 dozen but demand is only 10 dozen.
- As we know that suppliers will be more supplied at the highest price.
- But demand will be less at the highest price.
- This is due to the competition among the homogeneous products.
- Thus supply is more than demand.
- But when prices fall, supply also declines but demand will rise.
- As when price falls upto ₹ 3 from ₹5. Then demand will rise and demand supply will be in equilibrium.
- If more prices decline as ₹2 then demand will be increased. Due to the competition among buyers.
Now we can understand through Figure as How to Price determination under perfect competition
- Good units are shown on the x axis and the price shown on the Y axis.
- DD is the demand curve and it slopes downward from left to right.
- SS is the supply curve.
- It slopes upwards from left to right.
- DD and SS intersect each other at point E.
- In other words supply and demand are equal at E point.
- Thus at Point E will be equilibrium Price as ₹3.
It is clear from the figure that Every Supplier would like to supply at the highest price for the purpose of maximizing profit.
But Every customer would like to purchase more at a lower price. So these competitions remain in the perfect market. Then 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.
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.
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