Page 1 : we introduced the four market structures under which prices of, 10, PERFECT, 2, COMPETITION, 2.1, Meaning and Features, 2.2, Profit Maximisation, 2.3, Behaviour of Price, TR, AR and MR, 2.4, Equilibrium Conditions, 2.5, Firm's Supply Curve, 2.1 MEANING AND FEATURES, We often try to understand how prices of various commodities that, we consume are determined. It is an accepted fact that the demand, for and supply of a commodity determine its market price. But this, demand supply interaction is influenced by the economic, environment in which a seller operates. One of the most importa, rival, factor in that economic environment is competition. How, many, firms are selling the same or similar product? How are they pricne, their products? What kind of advertising campaign are the, planning? These questions constantly prove to challenge sellers., understand the significance of competition, in the previous chapte, products and profits of firms are determined. Markets are broady, grouped into:, Perfect competition

Page 2 : Perfect Competition, Imperfect competition, 11, Monopoly, Oligopoly, Monopolistic competition, We begin with the most basic market structure, perfect competition., Take the example of markets that sell wheat, rice, potatoes, gold or, foreign exchange. In these markets, a fairly large number of people, sell standardized products. In these markets, a single price prevails,, at a given point of time. To understand how such markets work, we, need to study the theoretical aspects of perfect competition., Theoretically, perfect competition is a market structure that is, primarily used as a benchmark or a model against which other,, market structures are compared. The more a market structure, deviates from perfect competition, the more imperfect it is, considered. Monopoly is the exact opposite of perfect competition., Perfect competition is also that 'ideal' market structure which, ultimately leads to optimum allocation of resources., Let us discuss the price determination and equilibrium of the firm, and industry under perfect competition. It is therefore necessary to, explain the concept of perfect competition., that, and, PERFECT COMPETITION, A market becomes perfectly competitive when the following, conditions exist., this, mic, tant, ival, ing, hey, To, (1) A Large Number of Buyers and Sellers: Both buyers and sellers, are in a large number, so that individually neither buyer nor, seller is in a position to influence the price. Influence of an, individual buyer or seller is absolutely insignificant. They will, have to accept the price established in the market. A single seller, cannot increase the price. If he does he will not get buyers. The, buyer cannot bargain for a lower price, as there are enough, huyers at the prevailing price., ter,, s of, dly, Homogeneous Commodity:A commodity sold in the market, is homogeneous, that is, identical in quality and quantity. A

Page 3 : difference of any type would provide an excuse for the sellen, to charge a higher price. When goods are homogeneous ther, is no possibility of charging a higher price by any seller unde, producer to produce a commodity and sell it in the marke, Business Economics-II (F.Y.B.Com.: SEM, 12, a, the pretext of qualitative or quantitative difference., (iii) Free Entry and Exit: There is no restriction whatsoever for, amy, Restriction may be in the form of Government's license, permit, non-availability of technology, inadequate finance et, Similarly a producer is free to wind up his business witho, any problems, legal or political. Such freedom avoids ex, supply or shortages., (iv) Complete Market Information : A perfect knowledge or, complete information about the market- price, demand, supply, etc. is expected to be possessed by all the buyers and sellers, Such knowledge will prevent the buyers from paying a higher, price and sellers charging a different price than what is, prevailing in the market., (v) Perfect Mobility of Factors of Production : Factors of, production are assumed to be freely mobile geographically and, occupationally. It mainly applies to labour and capital. Perfect, mobility helps diverting the factors to those areas where there, is more demand from the one where demand is deficient. It, helps adjust supply according to demand., (vi) No Transport Cost : Factors of production and goods are, transported from the place of production to the market without, any cost. Transport cost does not arise if we take small, geographical areas where production and sale takes place, within that area. Agricultural products can be sold in the same, village or town without incurring much transport cost. This, condition is assumed to avoid any possibility of charging a, higher price on the pretext of transport cost., al, Under the above conditions, for a particular commodity there, can be only a single uniform price throughout the market., A distinction is usually made between pure and perfect, competition. Of the six conditions mentioned above the first

Page 4 : EM-II), ellers, there, nder, Perfect Competition, three conditions make the competition pure and all six, conditions make it perfect. The latter is more restrictive market, than the former., 13, r any, rket., 2.2 PROFIT MAXIMISATION, se or, Business of a businessman is to maximise profit. A firm being a, rational business entity aims at earning maximum possible profit., For that purpose we require to understand certain revenue and cost, e etc., hout, xcess, concepts., We explain with the help of table 2.1, profit maximisation by a firm., e or, pply, llers., gher, at is, Table 2.1: Profit Maximisation - A Numerical Example, Output (Q), Price (P) R), TR, TC Profit (T) MR, MC, 30, 15, -15, 1, 30, 30, 30, 0., 30, 15, s of, and, 2, 30, 60, 40, 20, 30, 10, rfect, here, ht. It, 3, 30, 90, 60, 30, 30, 20, 4., 30, 120, 88, 32, 30, 28, 30, 150, 115, 35, 30, 30, 30, 180, 150, 30, 30, 35, are, 210, 190, 20, 30, 40, hout, nall, lace, ame, This, 30, 8, 30, 240, 235, 30, 45, From the above table, we can explain the behaviour of revenue, cost, and profit., The table 2.1 shows the output from 0-8. Price remains the same, as, It should be in perfect competition. We have total revenue (TR) by, multiplying output x price (Qx P), that is, TR = Q x P., ig a, ere, At 0 output, price 30 is shown as in perfect competition a firm is a, price taker, the price which already prevailed in the market. TC is, positive (15), as even at zero output fixed cost exists. Profit is negative, (-15) which is equal to TC., fect, irst

Page 5 : marginal revenue (MR) is equal to the difference in two subseq, TR and TC increase as the output increases. Profit (T) is equa, change in output. The change in output is equal to one. There, 14, Business Economics- II (F.Y.B.Com St, TR- TC., Perfect Con, 2.3 B, ATR, that is a change in TR due, Marginal revenue (MR), %3D, AQ, in, Under p, during t, total revenues., same fro, As the price remains the same, the total revenue increases bys, Averag, constant number, that is 30., .P= A, ATC, Marginal cost (MC) is equal to, We find that marginal cost, AQ, Margin, additio, initially declining and increasing thereafter., revenu, therefo, Profit is maximum when the difference between TR and TC is, largest. In table 2.1 at output 5, TR = 150, TC = 115 and profit =, the maximum profit., Total r, given c, by the, Symbolically, the relationship between the above variables, expressed below., same 1, right., Margi, addit, there, Px Q = TR, Total revenue is equal to Price x Quantity sol, (P x Q), ATR, in Ser, = MR, AQ, MR is the additional revenue earned by selling an, additional unit of output, ATC, = MC, AQ, MC is the additional cost incurred to produce an, additional unit of output. Equilibrium output, produced at a point MR = MC, Profit (n) = TR- TC, From the above equations we can prove,, TR, PxQ= Q, = AR, P AR