Perfectly Competitive Markets || Common Question || Perfect/ Pure Competition Characteristics and much more!

Perfectly Competitive Markets: Price taking. 

Perfect/Pure competition is a foundational concept in microeconomics 

that 3 describes a market structure characterized by certain key features. 

In a perfectly competitive market, there are many buyers and sellers who

deal in identical or homogeneous products, and no single firm has the 

power to influence the market price.

Perfect competition involves large number of firms producing a standardized

product.

Eonomists say that a market is competitive if each firm in market is a price 

taker, it means that a firm cannot significantly affect the market price for its 

output or the price at which it buys inputs.

Why would a firm in a competitive market be a price taker?

Competitive firm is a price taker because it has no choice. The firm must be 

a price taker if it faces a demand curve that is horizontal at the market price. 

If the demand curve is horizontal at the market price, the firm can sell as

much as it wants at that price, so it has no incentive to lower its price. 

Similarly, by limiting its output, the firm is unable to raise the price at which

it sells.

 Characteristics of different market types:

Perfect/ Pure Competition Characteristics:

Perfectly competitive markets have following characteristics that force firm 

to price takers:

 

• Large numbers of Buyers and sellers:

        In a perfectly competitive market, there is a significant number of 

        buyers and sellers, which ensures that no single firm can control the 

        market.

• All firms produce identical products: 

        All firms in a perfect competition market produce identical or homo-

        genous product. Buyers view the products of firm B, C, D as perfect 

        substitutes for firm A’s product because purely competitive firm sell

        identicalproducts, they make no attempts to differentiate their products.

 

• Perfect Information:

        Buyers and sellers have access to complete and perfect information 

        about prices, product quality, and market conditions. It enables in-

        formed decision making and ensures transparency.

 

• Free entry and exist:

        Firms can freely enter or exiting firms can freely leave purely comp-

        etitive industries. No significant barrier. Legal, technological, financial, 

        or other, prohibit new firms from forming and selling their output in any

        competitive market.

 

• Price takers: 

        Individual firms in a perfectly competitive market are price takers, 

        meaningthey accept the market price as given.They cannot set the price;

        they can only choose the quantity they want to produce or sell.

Profit Maximization: 

    Sub Objectives:

•  Maximization of sales.

• Maximization of firms’ growth rate.

• Maximization of firms’ dividend.

• Long run survival and market share.

• Maximization of profit.

    MR, MC and Profit Maximization:

• Profit Maximization:     Profit (π) = Total Revenue- Total cost

• Total Revenue (TR):     TR=PQ∆

• Total Costs (TC):          TC=C(Q)

· 

    Marginal Revenue:

        Change in revenue resulting from one unit increase in output. 

        The marginal  revenue is the slope of the total revenue curve.

                            

                                            

  

    Marginal Cost: 

        An additional charge for creating an extra unit of output. 

        Marginal cost determines the total cost curve's slope.

                                                

    Outputs Rules of Profit Maximization:

• A firm sets its output where its marginal revenue (MR)and marginal 

                 cost (MC) are equal.

• Firm sets its output where profit is maximized.

• A company decides to produce at the point of zero marginal profit.

     Shutdown Rules:

        If a company's income is less than its avoidable costs, it will only 

        

        shut down.

• Profit maximization conclusion:

For more information Click on Part 2!