Price Determination in Perfect Competition

Before determining price under perfect competition, you must know what is the meaning of perfect competition. 

Meaning of Perfect Competition

Perfect competition is a market in which there are many firms selling identical products who no firms large enough relative to the entire market to be able influence market price.

The perfect competition is characterized by the presence of many firms. They all sell identical products. The seller is price taker, not price maker. 

Perfect competition when the demand for output of each producer is perfectly elastic

Assumption of Perfect Competition 

1. Large number but small of buyers and sellers

2. Homogeneous Products 

3. Perfect Knowledge

4. Free Entry and Exit of Firms

5. Free of Checks 

6. Perfect Mobility 

7. Lack of Transport Cost

8. Lack of Selling Cost 

Pure and Perfect Competition

If there are following conditions that any market satisfy, it will perfect competition

a) large no. of sellers and buyers

b) same goods

c) free entry and exit of sellers

d) Less barriers

e) less selling cost

f) less carrying cost

Perfect competition 

If market has not full knowledge and full mobility, then pure competition convert in perfect competition

Price determination under perfect competition

Explanation 

Price Determination in Perfect Competition

In perfect competition, seller does not fix the price of his selling goods. Price is fixed by industry. Industry is the group of all sellers in the market. Price must be determined at the point where the market demand quantity will equal to the supply quantity by industry. 

If price is 5, demand is only 10 and supply quantity is 50 pieces of fruits. Now price will decrease and reach 3 where supply and demand quantity is equal 30 pieces. Now, this current price will fix. If the price is only Rs. 1, and demand is 50 pieces and supply is 10 pieces, it means demand is 5 times more than its supply. Rich buyer will ready to buy it higher price. So, Price will shift upword and it will reach 3 but at there, supplier motivated high price and it has increased production of fruits and supplied 3 times of past supply and with more supply, demand will spread and demand will satisfied and it will decreased to 30 pieces. Now, where is equilibrium of demand and supply, price will fix. 

1. Effect of Changes of Demand  on Price

If supply does not change in perfect competition, price will  increase if demand will increase. If demand will decrease, price will decrease. 

2. Effect of Changes of Supply on Price 

If demand does not change, and supply changes in perfect competition, by increasing supply, price will decrease and by decreasing supply, price will increase

In this video, you will learn price determination in perfect competition.