Perfect Competition

Perfect competition is a market structure in which there are a large number of producers producing a homogenous product so that no individual firm can influence the price of the commodity.

Features of Perfect Competition Market

  1. A large number of buyers and sellers
  2. Homogenous products
  3. Freedom of entry and exit
  4. No influence over the prices
  5. Perfect knowledge about the market
  • The demand curve under perfect competition is perfectly elastic i.e. parallel to the X-axis. This is because no individual firm in the market has the power to influence the prices. Hence, the prices remain constant. The firms under perfect competition are the price takers and not price makers. They borrow the prices from the industry as a whole.
  • Under this form, the demand is equal to its marginal revenue curve. The demand curve or the average revenue curve of Perfect competition can be seen as:-
perfect competition

The graph shows that the prices are constant and no individual firm can influence it. The prices are borrowed from the industry and so the demand curve is a straight line parallel to X-axis.

  • Short-run equilibrium under perfect competition- Under perfect competition, the equilibrium point is determined where MC = MR and the MC curve cuts the MR curve from below. The firms also have three situations of profits, losses, and zero economic profits in the short run.
  • Long-run equilibrium under perfect competition- Under perfect competition, only zero economic profits exist in the long run. Here, the Price is equal to the marginal cost as well as to the average cost of the firms. The equilibrium condition of the firms in the long run too remains the same i.e. MC = MR and the MC curve cuts the MR curve from below.
  • Perfect competition is unrealistic in today’s world.

Numerical example:-

Q- Below is a table of a Total cost schedule. The price of the products in the firm is $ 8. Calculate the quantity produced and the profits.
Quantity Sold (Units)TC ($)
0 5
1 7
2 10
3 12
4 15
5 23
6 33
Ans- Under perfect competition, the equilibrium condition is MC = MR. For this purpose, the first MC is to be calculated.
MR is equal to the prices under perfect competition, hence MR = $ 8 (P)
Calculating MC:-
Quantity Sold (Units)TC ($)MC
0 5 -
1 7 2
2 10 3
3 12 2
4 15 3
5 23 8
6 33 10
So, according to the table, MC = MR i.e. $ 8 where Quantity sold is 5 units and the TC is 23.
To calculate profits:- (TR ˗ TC)
TR = 8 × 5 = $ 45
Profits= 45 ˗ 23 = $ 17
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