Economics Classes Online Notes- Price Determination Under Perfect Competition
Class 12 Economics: Perfect competition market refers to a market situation where a large number of buyers and sellers are dealing in a homogeneous product.
Also, there are no legal, social or technological barriers on the entry and exit of any firm. It means that any firm is free to enter the market when finds it profitable and can leave it when wishes to do so.
Under the perfect competition market, the industry is the price maker and the firm is the price taker. It means that the price of the goods and the services are determined by the industry and they are accepted by the individual firms.
A FIRM is a producing unit which produces goods and services with the motive of earning profit through its sale.
An INDUSTRY is an aggregate of all the firms producing the same commodity. Alternatively, all the firms producing and selling the same product are collectively known as an industry.
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In case of perfect competition market, the price is determined by the industry by the interaction of market demand and market supply of the whole industry. The demand and supply represented below is the total demand and total supply of industry which by their interaction help to determine the equilibrium price. No individual firm can influence the equilibrium price since its share in the total supply is insignificant. Rather, it has to accept the price determined by the industry and it has to sell its products at that price.
Market and firm demand curves in a perfectly competitive market
Also, In case of perfect competition,
PRICE = AR = MR
The firm’s AR and MR curves are a horizontal straight line parallel to X-axis. It is also called the PRICE LINE.
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