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Unit 10: Market Structure – Perfect Competition




          7.   Perfect knowledge: It is assumed that all the sellers and buyers have complete knowledge   Notes
               of the conditions of the market. This knowledge refers not only to the prevailing conditions
               in the current period but in all future periods as well. Information is free and cost less.


                 Example: By design, a stock exchange resembles a perfect competition, not as a complete
          description (for no markets may satisfy all requirements of the model) but as an approximation.
          The flaw in considering the stock exchange as an example of Perfect Competition is the fact that


          large institutional investors (e.g. investment banks) may solely influence the market price. This,
          of course, violates the condition that “no one seller can influence market price”.

          Free software works along lines that approximate perfect competition. Anyone is free to enter

          and leave the market at no cost. All code is freely accessible and modifiable, and individuals are
          free to behave independently. Free software may be bought or sold at whatever price that the
          market may allow.
          Another very near example of perfect competition would be the fish market and the vegetable or

          fruit vendors who sell at the same place.
          1.   There are large number of buyers and sellers.
          2.   There are no entry or exit barriers.
          3.   There is perfect mobility of the factors, i.e. buyers can easily switch from one seller to the
               other.

          4.   The products are homogenous.
          Source: www.wikipedia.com




              Task    Analyze stock market on the basis of the features of perfect market. Do you
             find it close to the perfect market?


          Market Condition

          The assumptions of perfect competition imply that a particular relationship exists between the
          firm and its market.

          Figure 10.2(a) shows the market demand curve for a product. It shows the total amount of this
          product demanded by consumers at different prices. It is a normal downward sloping demand
          curve showing that for the industry as a whole quantity demanded increases as price falls.

                  Figure 10.2: Relationship between the Market and the Firm in Perfect Competition

                      Price                     Revenue
                           The Market                     The Firm
                                         S

                     P 1
                     P                                                AR = MR
                     P 2
                                         D
                                             Q                           Q
                      0          (a)                         (b)





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