Perfect Competition

Perfect Competition

 1Define a firm.
Ans: A firm is an organization that comes into being when a person or a group of people decided to produce goods or services to meet the consumers demand.
 
2Define market.
Ans: The term market refers to a structure in which the buyers and sellers of a commodity remain in close contact with each other.  
3Define perfect competition.
Ans: Perfect competition refers to a market in which a very large number of buyers and sellers exchange a homogeneous product at the market determined price.  
4Meaning of Pure Competition and Perfect Competition.
And: According to Prof. Chamberlin, when a market satisfies three condition- large number of sellers and buyers , homogeneous product and entry and exit of firms are free- it is called as pure competitive market. On the other hand, perfect competition implies a market situation where, in addition to the above three conditions market also satisfies few other conditions, like – perfect knowledge, uniform price and no transportation cost.  
5Explain the objectives of the firms.
Ans: The main objective of a firm is to maximize profit. However, today one cannot deny the fact that along with profit maximization, the business also has certain objectives towards the local society as well as the nation. The main objectives of a firm are as follows:
Organic Objectives:
Survival: A firm cannot grow until it survives in a competitive business world. In the era of globalization with high competition, survival has become very difficult for each and every firm.
Growth:  Stable growth of a firm is considered another important objective. Business growth benefits promoters, shareholders, consumers and overall the country.
Prestige: Goodwill or reputation arising from the success of a firm depends on the society. Along with the profit, a firm also wants to create a good image and goodwill in the market.
Economics Objectives:
Profit: the main objective of a firm is to earn profit. It is the livelihood of a business, without it no business can survive in a competitive market.
Creating and Retaining Customers: Consumer is a king of the market. All the business activities revolve around the consumers. Success of a business depends upon its consumers.
Innovation: Innovation is the act of creating something new. Creativity improves quality of a product as well as it reduces cost of production also. To survive in the intensely competitive world, the business has to be innovative.
Sales maximization: Modern firm often measures their success in terms of market share they enjoy. They often want to increase their market share- even if it means less profit.     
6Explain the different Structure (Classification) of a market.
Ans: Different  Criteria of Classification of Markets:
On the Basis of Competition: The most widely used classification of market in economics is according to the degree of competition. On the basis of competition market can be classified into:Perfect competition.Monopoly.Monopolistic Competition.Oligopoly.
On the Basis of Area: Local Market:  It constitutes commodities which are sold in the vicinity of the place of production. Examples, vegetables, bricks, sand etc.   Regional Market: It constitutes semi-durable goods durable goods. In this market, goods are sold in large area.       National Market: If the commodity is sold across the nation, the market is called national.   International Market: If the commodity is exported to other nations, the market is called international market.  
 
On the basis of Nature of Commodity: According to the type of commodity or service being sold, market can be classified as commodity market, factor market, fish market etc.

On the Basis of Quantity of the Commodity: Wholesale market and retail market.

On the Basis of Nature of Transaction: 
 Spot Market: Spot refers to those markets where goods are purchased and sold on the spot.Future Market: It is related to those transactions which involve contracts of a future date.

On the Basis of Regulation:Regulated Market: In this type of market, transactions are regulated by the government or government authorized institution.Unregulated Market: It is also called free market as there are no restrictions on the transaction.

On the Basis of Time Element: Very Short Period or Market Period: It refers to the very short time period. In this market supply is fixed i.e. supply is perfectly inelastic and it is demand which determine price.Short Period Market: In this market, time span is larger than very short period. Here, producer can increase production to some extent.Long Period Market:  In this market, time is enough to increase production by increasing factors of production. Very Long Period or Secular Market:  in this period, the consumer’s tastes and preferences, social customs, technology etc. can change drastically.     
7Define perfect competition. Explain the main features of perfect competition.
Ans: Perfect competition is a market structure where large number of sellers are selling homogeneous product.
Main features of Perfect Competition:
i) Large Numbers of Buyers and Sellers: The number of firms is so large that an individual seller or an individual buyer cannot influence the prevailing market price. A firm can sell as much of its product as it likes at the going price.
ii). Homogeneous Product: The products produced by different firms are similar in nature, i.e. all firms sell the identical product. It implies that buyers do not have any preference for the product of a particular seller.
iii). Free Entry and Free Exit: There is freedom of entry and exit from the perfectly competitive market. This means that any new firm is free to start production, if it so wishes, and any existing firm is free to stop production and leave the industry if it so wishes. Existing firms cannot bar the entry of new firms and there are no legal prohibitions on entry or exit.
iv) Price Taker: Since all the firms are producing homogeneous product, therefore a single seller cannot charge different price by showing its product. It is the industry which determine price of a commodity in this market. So, a firm in this market is price taker.
v). Perfect Knowledge: There is perfect and complete knowledge on the part all buyers and sellers about the all conditions in the market.  All the buyers have perfect knowledge about the product knowledge. Similarly all the sellers have perfect knowledge about product market as well as factor. Therefore, a uniform price prevails in the market.
vi). Perfect Mobility: There is perfect mobility of factors of production both as geographically and occupationally. It means factors of production (land, labour, capital and entrepreneur) can freely move from one place to the other as well as from one firm to the other. There is no restriction on the mobility of factors of production.
vii). Absence of Advertisement Costs: In this market all firms are selling homogeneous products and they are perfectly substitutes of each other. Therefore, advertisement cost becomes irrelevant in this market.  
8Explain the implications of ‘large number of buyers and sellers’ and ‘homogeneous product’ features of perfect competition.
Ans: a. Implication of ‘Large Number of Buyers and Sellers’  Under perfect competition, the numbers of sellers are so large that each seller supplies a very small portion of the total quantity offered in the market. In this situation, any increase or decrease in supply by an individual seller has negligible effect on the total supply of the commodity in the market. As a result, a single seller is not in a position to influence the price of the product and therefore, takes the price of the product. Similarly, the number of buyers is so large that the demand of each buyer is a very small portion of the total demand of the market. Under such condition, no single buyer shall be able to influence the market price of the commodity by increasing or decreasing its purchases.
b. Homogeneous Product: The product produce by the firms under perfect competition is homogeneous in nature which means products are identical in shape, size, colour taste etc. It means products of various firms are perfect substitutes for one another. As a result of this feature, the buyer cannot distinguish between the product of one firm and that of another. Therefore, buyer becomes indifferent to the particular firm from which he buys. In this situation, no firm can charge different price of the product it produces. Hence, a uniform price prevails in the market and demand curve is perfectly elastic.                                                                                                                                                 
9Explain the shape of Average Revenue (AR) and Marginal Revenue (MR) under perfect competition. Ans: In perfect competition, a firm can sell any amount of output at a given price. It means firm’s additional revenue (MR) from the sale of every additional unit of the commodity will be just equal to the market price (AR). Hence Average Revenue and marginal revenue become equal (AR=MR) and constant in that situation. As a result the AR curve and MR curve will be same and both curve will be horizontal or parallel to the X-axis.  
 10Explain a firm under Perfect Competition is  Price Taker
Ans: In a perfectly competitive market, the price of a commodity is determined by the demand and supply of the whole industry. A firm working under the industry has to accept the price decided by the industry. Here the group of firms collectively known as industry. Under perfect competition the price of a commodity is determined by intersection of market demand and market supply of the whole industry.  Therefore, industry is called price maker. Every firm has to accept the price determined by the industry. It means a firm cannot change the price, it takes the price as it is and hence known as price taker. Diagram We know that all firms under perfect competition produce homogeneous products. It implies that all firms charge the same price for the products. If any firm attempts to charge a higher price, no buyer buys it from the firm. Besides this, there are a large number of firms. It implies that each firm is so small compared to the market that no single firm can influence the market price.
    

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