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    Price Determination Under Perfect Competition: Unit 9

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    Gayl Ignacio Tolentino
    This document discusses price determination under perfect competition. It defines key terms like market, market structure, and perfect competition. Perfect competition is described as having many small firms, similar products, free entry and exit, and full information. The market price is determined by the equilibrium of industry supply and demand. In the short run, firms may earn profits or losses, but in the long run all firms will earn normal profits and there will be no incentive for firms to leave or enter the industry.

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    Price Determination Under Perfect Competition: Unit 9

    Uploaded by

    Gayl Ignacio Tolentino
    2K views11 pages
    This document discusses price determination under perfect competition. It defines key terms like market, market structure, and perfect competition. Perfect competition is described as having many small firms, similar products, free entry and exit, and full information. The market price is determined by the equilibrium of industry supply and demand. In the short run, firms may earn profits or losses, but in the long run all firms will earn normal profits and there will be no incentive for firms to leave or enter the industry.

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    This document discusses price determination under perfect competition. It defines key terms like market, market structure, and perfect competition. Perfect competition is described as having many small firms, similar products, free entry and exit, and full information. The market price is determined by the equilibrium of industry supply and demand. In the short run, firms may earn profits or losses, but in the long run all firms will earn normal profits and there will be no incentive for firms to leave or enter the industry.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    2K views11 pages

    Price Determination Under Perfect Competition: Unit 9

    Uploaded by

    Gayl Ignacio Tolentino
    This document discusses price determination under perfect competition. It defines key terms like market, market structure, and perfect competition. Perfect competition is described as having many small firms, similar products, free entry and exit, and full information. The market price is determined by the equilibrium of industry supply and demand. In the short run, firms may earn profits or losses, but in the long run all firms will earn normal profits and there will be no incentive for firms to leave or enter the industry.

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    You are on page 1of 11

    UNIT 9

    PRICE DETERMINATION
    UNDER PERFECT
    COMPETITION
    MARKET AND MARKET
    STRUCTURE
    THE TERM MARKET REFERS NOT NECESSARILY TO A PLACE BUT
    ALWAYS TO A COMMODITY AND THE BUYERS AND SELLERS WHO ARE
    IN DIRECT COMPETITION WITH ONE ANOTHER.

    MARKET STRUCTURE ARE THOSE CHARACTERISTICS WHICH AFFECT


    THE NATURE OF COMPETITION AND PRICING.
    PERFECT COMPETITION
    PERFECT COMPETITION IS A TYPE OF MARKET STRUCTURE
    WHERE MANY FIRMS SELL SIMILAR PRODUCTS – AND PROFITS
    ARE VIRTUALLY NON-EXISTENT DUE TO FIERCE COMPETITION.
    THERE ARE 5 KEY CHARACTERISTICS A PERFECT COMPETITION HAS:
    • MANY COMPETING FIRMS
    • SIMILAR PRODUCTS SOLD
    • EQUAL MARKET SHARE
    • BUYERS HAVE FULL INFORMATION
    • EASE OF ENTRY AND EXIT
    PRICE-OUTPUT DETERMINATION
    UNDER PERFECT COMPETITION
    THE MARKET PRICE AND OUTPUT IS DETERMINED ON THE BASIS OF
    CONSUMER DEMAND AND MARKET SUPPLY UNDER PERFECT
    COMPETITION. THE FIRMS AND INDUSTRY SHOULD BE IN
    EQUILIBRIUM AT A PRICE LEVEL IN WHICH QUANTITY DEMAND IS
    EQUAL TO QUANTITY SUPPLIED.
    SHORT-RUN INDUSTRY EQUILIBRIUM
    UNDER PERFECT COMPETITION
    IS A GROUP OF FIRMS PRODUCING HOMOGENEOUS PRODUCTS IN A
    MARKET. ACCORDING TO LIPSEY, "INDUSTRY IS A GROUP OF FIRMS
    THAT SELLS A WELL-DEFINED PRODUCT OR CLOSELY RELATED SET
    OF PRODUCTS. "

    WHEN ITS TOTAL OUTPUT REMAINS STEADY, THERE BEING NO


    TENDENCY TO EXPAND OR CONTRACT ITS OUTPUT.
    SHORT-RUN FIRM EQUILIBRIUM
    UNDER PERFECT COMPETITION
    1. ALL FIRMS USE HOMOGENEOUS FACTORS 5. FIRMS PRODUCE AND SELL DIFFERENT
    OF PRODUCTION QUANTITIES.
    2. FIRMS ARE OF DIFFERENT EFFIECENCY.       • MARGINAL COST - MARGINAL REVENUE
    3. COST CURVES OF FIRMS VARY FROM EACH ANALYSIS
    OTHER       • SUPERNORMAL PROFITS
    4. ALL FIRMS SELL THEIR PRODUCTS AT THE       • NORMAL PROFITS
    SAME TIME PRICE DETERMINED BY DEMAND       • MINIMUM LOSS
    AND SUPPLY OF THE INDUSTRY SO THAT THE       • MAXIMUM LOSS
    PRICE OF EACH FIRM, P (PRICE) = AR = MR.       • SHUTDOWN STAGE
          • TOTAL COST - TOTAL REVENUE
    ANALYSIS
    LONG-RUN INDUSTRY EQUILIBRIUM
    UNDER PERFECT COMPETITION

    THE INDUSTRY IS IN EQUILIBRIUM IN THE LONG-RUN WHEN ALL


    FIRMS EARN NORMAL PROFITS. THERE IS NO INCENTIVE FOR FIRMS
    TO LEAVE THE INDUSTRY OR FOR NEW FIRMS TO ENTER IT. WITH ALL
    FACTORS HOMOGENEOUS AND GIVEN THEIR PRICES AND THE SAME
    TECHNOLOGY, EACH FIRM AND INDUSTRY AS A WHOLE ARE IN FULL
    EQUILIBRIUM WHERE LMC = MR = AR (-P) = LAC AT ITS MINIMUM.
    LONG-RUN FIRM EQUILIBRIUM
    UNDER PERFECT COMPETITION

    THE LONG RUN IS A PERIOD OF TIME IN WHICH THE FIRM CAN


    CHANGE ITS PLANT AND SCALE OF OPERATIONS. THUS IN THE LONG-
    RUN ALL COSTS ARE VARIABLE AND THERE ARE NO FIXED COSTS.
    THE FIRM IS IN THE LONG-RUN EQUILIBRIUM UNDER PERFECT
    COMPETITION WHEN IT DOES NOT WANT TO CHANGE ITS
    EQUILIBRIUM OUTPUT.

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