Perfect Competition
Perfect competition is a market situation in which buyer and sellers operate freely and a commodity sells at a uniform price. The number of buyer and seller is so large that no single buyer can influence the market price.
Features
· Large no buyers and sellers:- In perfect competition, the number of buyers and seller is very large, as a result, none of them can influence the prevailing price in the market because the quantity purchased or sold is very less to influence the market price. Hence no single buyer or seller can influence the market price.
Implication:-The number of buyer and seller is so large that no single buyer and seller can influence the market price.
· Homogeneous product:- The products which were sold in the perfect competition are homogeneous i.e. identical in shape, size, color, quality, packing etc. They are the perfect substitute for each other. As a result, no seller can sell the product at more than the price. In the same way, the buyer is also neutral toward the producers as the result uniform price prevails.
Implication;- The implication of this feature is that buyer treat the product as identical. Therefore, the buyers are willing to pay only the same price for the product of all the firms in the industry. It also implies that no industrial firm is in the position to charge a higher price for its products. This ensures uniform price in the market.
· Uniform price:- in this market price of product price of the product is uniform i.e. the price of each and every product sold in the market is same because it is the industry which decides the price with help of demand and supply forces and every firm prevailing in the market has to accept this price.
· Free entry and exit:-In perfect competition there is complete freedom for each firm either to enter or exit the industry. For example:- if an industry gaining supernormal profit than new firms may be tempted to enter the market on the other hand if the industry is having losses then existing firm may choose to exit.
Implication:- the implication of free entry and exit is that all the firms will earn normal profits only in long run. A firm can earn super profit only in a long run. A firm can earn supernormal profit or losses only in short run since abnormal profit will attract new firm whereas losses will include existing firms to quit the industry in short run, under long run there can only be normal profits.
· Perfect knowledge:- under perfect competition both buyer and seller have perfect knowledge about the market situation i.e. they know that at what price the commodity is to be bought or sold and cost prevailing different parts of the market. All firms have equal access to technology and input, this ensures that all firms have same per unit cost of production.
Implication:- clearly this leads to uniform price and uniform cost of the product. Since there is uniform cost and uniform price, therefore all firms earn uniform profits because profit equals price minus cost in other words all the firms earn normal profits.
· firm is the price taker:- in perfect competition firm is price taker because it has to accept the price determined by industry by the help of demand and supply forces. this can be shown with the help of the diagram.
Industry
fig.1
Firm
fig.2
Under perfect competition price of the commodity is determined by the equilibrium between demand and supply of whole industry. It is not determined by single firm but by the collective body of producer and consumer. No individual firm can influence the price because each seller sells a very small part of the total output.so it has to accept the price determined by the industry.
It can be explained with the help of schedule
industry
|
firm
|
|||||
price
|
demand
|
supply
|
price
|
T.r (p*q)
|
A.r
|
M.r
|
2
|
100
|
20
|
6
|
6
|
6
|
6
|
4
|
80
|
40
|
6
|
12
|
6
|
6
|
6
|
60
|
60
|
6
|
18
|
6
|
6
|
8
|
40
|
80
|
6
|
24
|
6
|
6
|
10
|
20
|
100
|
6
|
30
|
6
|
6
|
According to the above schedule, the price determined is Rs.6 per unit because at this price demand and supply are equal. This is shown diagrammatically above in fig.1 and fig.2.
Monopoly
It is a market situation where there is only one seller of the commodity and has no close substitute. In other words, it may be defined as a market situation where firms and industry are the same firm decides the price of the commodity.
According to Ferguson:- A monopoly exists when there is only one producer in the market and there are no direct competitors.
important question on forms of market
Features:-
· single seller and large number:- in monopoly there is a single seller selling the product. As a result, the monopoly firm and industry are one and the same thing and monopolist have full control over supply and price of the product. However, there are a large number of buyers of monopoly product and no single buyer can influence the market price.
· Price determination:- price determination is one of the major characteristics of monopoly market price discrimination refer to charging a different price for different customers for the same commodity .a monopolist uses this strategy to gain maximum profit.
· Firm is price maker:- A monopoly firm has full control over the supply of the product. Therefore it has full control over its price also. It can influence the market price by changing the level of supply of the commodity.
· Restricted entry of new firms:- In a monopoly, there is a restriction on the entry of new firms in the market. This restriction may be in the form of license, copyright, patent, government etc. The monopolist makes sure that no firm can enter in the market to compete with him. As a result, a monopoly firm can earn an abnormal profit in the long run.
· No close substitute:- In monopoly the product has no close substitutes i.e. no commodity is available in the market which can be used in the place of existing commodity. As a result, the consumer will have to buy the commodity from the monopolist.
· Negatively slopping curve:- The curve of monopoly demand is negatively slopping i.e. downward slopping which means that if the firm wants to increase its sale than it has to decrease its price. It can be shown in figure 3.
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