Page 146 - DECO101_MICRO_ECONOMICS_ENGLISH

Pavitar Parkash Singh, Lovely Professional University
Unit 10: Market Structure – Perfect Competition

Unit 10: Market Structure – Perfect Competition Notes

CONTENTS

Objectives
Introduction
10.1 Features of Perfect Competition
10.2 Short Run Equilibrium of a Perfectly Competitive Firm
10.3 Long Run Equilibrium of a Perfectly Competitive Firm

10.4 Supply and Demand Together
10.5 Perfect Competition: Existence in Real World
10.6 Summary
10.7 Keywords

10.8 Self Assessment
10.9 Review Questions
10.10 Further Readings

Objectives

After studying this unit, you will be able to:

State the features of perfect competition

Explain the behaviour of a perfectly competitive firm in short run

Describe the behaviour of a firm under perfect competition in long run
Discuss the existence of perfect competition in real world

Introduction

The function of a market is to enable an exchange of goods and services to take place. A
market is any organisation whereby buyers and sellers of a good are kept in close touch with
each other. It is precisely in this context that a market has four basic components (i) consumers
(ii) sellers (iii) a commodity (iv) a price. Price determination is one of the most crucial aspects in
micro-economics. Business managers are expected to make perfect decision based on their
knowledge and judgment. Since every economic activity in the market is measured as per price,
it is important to know the concepts and theories related to pricing under various market forms.
Perfect competition is a market structure characterised by a complete absence of rivalry among
the individual firms. Thus, perfect competition in economic theory has a meaning diametrically

opposite to the everyday use of this term. In practice, businessmen use the world competition as
synonymous to rivalry. In theory, perfect competition implies no rivalry among fi rms.
In a perfectly competitive market structure there is a large number of buyers and sellers of the
product and each seller and buyer is too small in relation to the market to be able to affect the
price of the product by his or her own actions. This means that a change in the output of a
single firm will not perceptibly affect the market price of the product. Similarly, each buyer of

the product is too small to be able to extract from the seller such things as quantity discounts and
special terms.

LOVELY PROFESSIONAL UNIVERSITY 141