Pricing under perfect

competition

CHAMEI S
Perfect Competition
• Perfect competition is defined as a market
situation where there are a large number of
sellers of a homogeneous product. An individual
firm supplies a very small portion of the total
output and is not powerful enough to exert an
influence on the market price.
PRICE UNDER PERFECT COMPETITION
Supply of Price per Demand
goods unit for goods
50 5 10

40 4 20

30 3 30

20 2 40

10 1 50

Equilibrium price is determined at that point at which aggregate demand of

commodity is equal to aggregate supply.
Effect of change in Demand and
supply on Price
DETERMINATION OF MARKET PRICE OR VERY
SHORT PERIOD EQUALIBRIUM
• MARKET PRICE: Price of commodity which
prevails in a market at a particular time.

• There are two types of Goods in the market as:-

i. Perishable Goods
ii. Durable Goods
 Perishable & Durable Goods

DD is the market demand curve. With perfect competition between buyers and
sellers, an equilibrium price OP will be determined at which the quantity
demanded is equal to the available supply. That is, equilibrium price will be
established at the point where downward sloping demand curve DD intersects
the vertical supply curve MS.
At price OP’, the whole of the stock is offered for sale, and beyond the price
OP’, the quantity supplied remains the same whatever the price. Therefore,
beyond the price OP’, the market supply curve will be vertical straight line
(FS’). DD is the demand curve which slopes downwards from left to right.
Market price comes to settle at OP, because at this price the quantity
demanded is equal to the quantity supplied. At this equilibrium price OP,
OM amount from the stock is sold, while the rest of the stock, i.e., MQ (=
RC) is held back from the market.
Price determination under perfect competition
is analyzed under three different time periods:

a) Market Period : In a market period, the time span is so short

that no firm can increase its output. The total stock of the
commodity in the market is limited. The market period may be
an hour, a day or a few days or even a few weeks depending
upon the nature of the product
b) Pricing in the Short Run : Short period is the span of time
so short that existing plants cannot be extended and new plants
cannot be erected to meet increased demand. However, the
time is adequate enough for producers to adjust to some extent
their output to the increase in demand by overworking their
fixed capacity plants. In the short run, therefore, supply curve is
elastic.
•
PRICING IN SHORT RUN
C) Pricing in the Long Run:The long run is a period of time
long enough to permit changes in the variable as well as in the
fixed factors. In the long run, accordingly, all factors are variable
and non- fixed. Thus, in the long run, firms can change their
output by increasing their fixed equipment. They can enlarge the
old plants or replace them by new plants or add new plants.
PRICING IN LONG RUN
FEATURES/CHARACTERISTICS OF PERFECT
COMPETITION

 Large number of Large

 Number of buyers

 The product is homogeneous

 No barriers to entry
 Complete information
 Profit maximization