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Sia ? 3 years, 8 months ago
Perfect Competition: It is a market wherein there is a large number of buyers and sellers of a homogeneous product and the price of the product is determined by the industry. Firms are price takers in this form of market. There is one price that prevails in the market and all the firms sell the product at the prevailing price.
Features of Perfectly Competitive Market:
- Free and Perfect Competition: In a perfect market, there are no checks either on the buyers or sellers. They are free to buy or to sell to any person. It means there are no monopolies.
- Cheap and Efficient Transport and Communication: Uniform price for the commodity would not be possible if the changes in the prices are not quickly adjusted or the commodity cannot be quickly transported. Thus cheap and efficient means of transport and communication are a must.
- Wide Extent: Sometimes a wide market is regarded as the same thing as the perfect market. For a wide market, the commodity should have permanent and universal demand. The commodity should be portable. Means of transport and communication should be quick. There should be peace and security and an extensive division of labour.
- A large number of firms: In this market, a product is produced and sold by a large number of firms. Since there is a large number of firms, therefore each firm is supplying only a small part of the total supply in the market, thus no one firm has any market power. It implies that no firm can influence the price of the product rather each must accept the price set by the forces of market demand and supply. The firms are price-takers instead of price-makers.
- A large number of buyers: In a perfectly competitive market, there are large numbers of buyers each demanding a small part of the total market supply of the product. As a result, no single buyer is in a position to influence the market price determined by the forces of market demand and supply.
- Homogeneous Product: In a perfectly competitive market, all the firms produce and supply the identical products. It means that the products of all the firms are perfect substitutes for each other. As a result of this, the price elasticity of demand for a firm’s product is infinite.
- Free entry and exit: In a perfectly competitive market, there are no restrictions on the entry of new firms into the market or on the exit of existing firms from the market. That's why firms in long run earn an only normal profit.
- Perfect knowledge: In a perfectly competitive market, the firms and the buyers possess perfect information about the market because the product is homogeneous in nature. It implies that no buyer or firm is ignorant about the price prevailing in the market. Buyers and Sellers have a perfect knowledge of the quantities of stock of goods in the market, the conditions of the market prices and at which transactions of sale or purchase are happening.
- Perfect mobility of factors of production: In a perfectly competitive market, the factors of production are completely mobile leading to factor-price equalization throughout the market.
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Let n units of good X he will buy at this price fall ₹ 4
Now
P = 5 , Q = 10
Now it is given that the price elasticity of demand is 2
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