Pricing in Perfect Competition: Features of Perfect Competition Market

In a perfectly competitive market, there are numerous buyers and sellers selling homogenous products in the market. In the market, no one is able by his own actions to influence the market price since all have access to full and immediate knowledge of the price at which the trading is currently taking place. Let us learn Pricing in Perfect Competition.

Pricing in Perfect Competition

Features of Perfect Competition Market

The perfect competition market has the following features.

1. A large number of sellers and buyers
2. Homogeneous Commodities
3. Free entry and exit
4. The mobility of factors of production
5. The absence of transport cost
6. Perfect knowledge of the market

1. A large number of sellers and buyers

There will be a large number of sellers and buyers for a good in this market. Thus, the output of a buyer or a seller is only a small part of the total output.

Also, a single producer or seller cannot change the price and thus, none of them is large enough to control the price. Therefore a seller is the price taker and not the price maker. The producer is a price taker.

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2. Homogeneous Commodities

Products in this market are identical in every aspect. A consumer shall get the same good from anywhere he purchases them. As a result, a commodity will have the same price all over the market.

3. Free entry and exit

Any firm is free to enter into the market as per its desire. Finally, it can leave production at any time. This helps new firms to enter into the business when conditions are favorable.

As long as a firm earns supernormal profits, it usually stays in the competition. In case of losses, firms shall start exiting the market.

4. The mobility of factors of production

The mobility of factors of production means that all the factors are easily moveable from one production to another easily. This is also useful for free entry and exit of firms factors (land, labor, capital) move to the production activities where they get higher incomes.

5. The absence of transport cost

Under a perfect market, transport costs should not be added to the price. If transport costs are added the goods are available at fewer prices at the near markets and they are available at the higher prices at distant markets. So the transport cost should not be added.

6. Perfect knowledge of the market

Buyers and sellers in this market will have a clear knowledge of market conditions. Thus, there will be one price throughout the market.

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Price determination in Perfect Competition

In perfect competition, the situation price is decided by the market. The market brings about a balance between the commodities that come for sale and those demanded by consumers.

Learn more about Pricing in Imperfect Competition here in detail

Therefore, the forces of supply and demand together determine the price of the good. The price at which the supply and demand are equal is the equilibrium price.

Examples on Pricing in Perfect Competition

Following table is given below showing quantity demanded and quantity supplied against different prices of a good ‘X’ in a perfectly competitive market. Explain what do you understand about the changes in supply, demand and equilibrium price with its help?

Price

Quantity demanded

Quantity supplied

500

400

300

200

100

200

300

400

500

Ans.

The above table shows the demand and supply schedule of good ‘X’. Changes in price always cause a change in supply and demand of a good. As the price increases, there is a fall in the quantity demanded. It means price and quantity demanded to have a negative relation. But the rise in prices has increased the supply of goods. The relation between the price and supply of goods is positive. At one price ₹ 30, it can be observed that the quantity supplied and demanded are equal. This is called the equilibrium price.

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Pricing in Perfect Competition

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