MARKET STRUCTURES AND
COMPETITION: PRICE & OUTPUT
DETERMINATION UNDER PERFECT
COMPETITION
Welcome to our presentation about “market structure and
competition : price & output determination under perfect
competition”. Understanding the different types of markets
and how prices are determined is crucial for any business or
consumer. Let's dive.
By – Tarun
– Rekha
MARKET
The knowledge of market and market structure with which a firm
operates is more helpful in price output decisions. Market in
economic term means a meeting place where buyers and sellers
deal directly or indirectly. Clark and Clark denes market as
that “any body of persons who are in intimate business relations
and carry on extensive transactions in any commodity”.
Market Structure
Market structure refers to the
way that various industries are
classified and differentiated in
accordance with their degree
and nature of competition for
products and services. It
consists of four types: perfect
competition, oligopolistic
markets, monopolistic
markets, and monopolistic
competition.
Perfect Competition
It is such a market structure where there are large number of
buyers and sellers of a homogeneous product and the price of
the product is determined by the industry. There is one price
that prevails in the market. All firms sell the product at the
prevailing price.
According to Leftwitch, "Perfect competition is a market in
which there are many firms selling identical product with no
firm being large enough relative to the entire market so as to
be able to influence market price."
Features or Characteristics of perfectly competitive market
1.Large number of buyers and sellers in the market
2.Homogeneous product
3.Free entry or exit
4.Perfect knowledge about the market
5.Perfect mobility of the factors of production
6.Non-Existence of transportation cost
Diagram for perfect competition
• The industry price is
determined by the
interaction of Supply and
Demand, leading to a price of
Pe.
• The individual firm will
maximise output where MR =
MC at Q1
• In the long run firms will
make normal profits.
Price Determination under Perfect
Competition
1 2 3
Demand Curve Cost Curve Equilibrium Price
For each firm, the demand Firms will produce where The intersection of the market
curve is perfectly elastic. marginal cost equals marginal demand curve and the market
revenue. supply curve determines the
equilibrium price.
Effect of Time on Supply
Short Run Supply Curve Long Run Supply Curve Very Long Run Supply
Curve
In the short run, the supply of In the long run, firms can enter or In the very long run, technology
goods and services is fixed. Firms exit the market. The supply of and innovation can change the
cannot enter or exit the market. goods and services is not fixed. supply of goods and services.
Efficiency of perfect competition
• Firms will be allocatively efficient P=MC Firms will be
productively efficient. Lowest point on AC curve.
• Firms have to remain efficient otherwise they will go
out of business. (X-efficiency)
• Firms are unlikely to be dynamically efficient because
they have no profits to invest in research and
development.
• If there are high fixed costs, firms will not benefit from
efficiencies of scale.
Examples of perfect competition
In the real world, it is hard to find examples of industries which fit all the criteria of ‘perfect
knowledge’ and ‘perfect information’. However, some industries are close.
1. Foreign exchange markets. Here currency is all homogeneous. Also, traders will have access to
many different buyers and sellers. There will be good information about relative prices. When
buying currency it is easy to compare prices
2. 2. Agricultural markets. In some cases, there are several farmers selling identical products to
the market, and many buyers. At the market, it is easy to compare prices. Therefore,
agricultural markets often get close to perfect competition.
3. 3. Internet related industries. The internet has made many markets closer to perfect
competition because the internet has made it very easy to compare prices, quickly and
efficiently (perfect information). Also, the internet has made barriers to entry lower. For
example, selling a popular good on the internet through a service like e-bay is close to perfect
competition. It is easy to compare the prices of books and buy from the cheapest. The internet
has enabled the price of many books to fall in price so that firms selling books on the internet
are only making normal profits.
Thank You
