Under perfect competition, the price of a homogeneous product is determined by market forces of supply and demand. Many small businesses each produce the exact same product, and can easily enter or exit the market. Buyers and sellers have complete information and the goal of all businesses is to maximize profits by producing where marginal costs equal marginal revenue. The equilibrium price is where the total quantity demanded is equal to the total quantity supplied in the market. This price will be the same across all businesses.

1. PRICE DETERMINATIONPRICE DETERMINATION
UNDERUNDER
PERFECT COMPETITIONPERFECT COMPETITION

2. PERFECT COMPETITIONPERFECT COMPETITION
Perfect Competition is that situation of thePerfect Competition is that situation of the
market wherein there are large number ofmarket wherein there are large number of
Buyers and sellers of a homogeneous productBuyers and sellers of a homogeneous product
and the price of such a product is determinedand the price of such a product is determined
by the market forces i.e ,the industry. All firmsby the market forces i.e ,the industry. All firms
sell the product at this price. In other words ,sell the product at this price. In other words ,
there prevails only one price of a product inthere prevails only one price of a product in
the marketthe market

3. ASSUMPTIONSASSUMPTIONS
 Many buyers/Many SellersMany buyers/Many Sellers – Many consumers with– Many consumers with
the willingness and ability to buy the product at a certainthe willingness and ability to buy the product at a certain
price, Many producers with theprice, Many producers with the willingnesswillingness and ability toand ability to
supply the product at a certain price.supply the product at a certain price.
 Homogeneous ProductsHomogeneous Products – The products of the– The products of the
different firms are EXACTLY the same, e.g. fruit.different firms are EXACTLY the same, e.g. fruit.
 Low-Entry/Exit BarriersLow-Entry/Exit Barriers – It is relatively easy to enter– It is relatively easy to enter
or exit as a business in a perfectly competitive market.or exit as a business in a perfectly competitive market.
 Perfect InformationPerfect Information - for both consumers and- for both consumers and
producersproducers
 Firms Aim to Maximise ProfitsFirms Aim to Maximise Profits - Firms aim to sell- Firms aim to sell
where marginal costs meet marginal revenue, wherewhere marginal costs meet marginal revenue, where
they generate the most profit.they generate the most profit.

4. PRICE UNDER PERFECTPRICE UNDER PERFECT
COMPETITIONCOMPETITION
SUPPLSUPPL
Y OFY OF
GOOD-GOOD-
XX
PRICEPRICE
PERPER
UNITUNIT
DEMADEMA
NDND
FORFOR
GOOD-GOOD-
XX
5050 55 1010
4040 44 2020
3030 33 3030
2020 22 4040
1010 11 5050Equilibrium price is determined at that point at which aggregate demand of
commodity is equal to aggregate supply.
D
D
S
S
EP
Q
o
x
Y Industry
surplus
Shortage
Quantity
Price
Equilibrium
Price

5. p1
p
p2
d2
d
d1
d1
d
d2
e2
e
e1
q2
q
q1
o x
y
Quantity
Price
p1
p
p
2
p2
q1
q q1
d
d
s1
s
s2
y
xo
s1
s
s2
e
e1
e2
Quantity
Price
Effect of change in Demand on Price Effect of Change in Supply on Price
D P S P

6. Time ElementTime Element
Very Short
Period
Short Period Long Period Very Long
Period
Market
Price
Sub Normal
Price
Normal
Price
Trade
Cycle

7. DETERMINATION OF MARKETDETERMINATION OF MARKET
PRICE OR VERY SHORT PERIODPRICE OR VERY SHORT PERIOD
EQUALIBRIUMEQUALIBRIUM
 MARKET PRICE: Price of commodity whichMARKET PRICE: Price of commodity which
prevails in a market at a particular time.prevails in a market at a particular time.
 There are two types of Goods in the marketThere are two types of Goods in the market
as:-as:-
 Perishable GoodsPerishable Goods
 Durable GoodsDurable Goods

8. Perishable Goods Durable GoodsPerishable Goods Durable Goods
o x
y
s
s
d2
d
d1
d2
d
d1
p2
p
p1
e1
e
e2
Quantity
y
o x
q2 q q1
p2
p
p1
e2
e
e1
S
d
d
d2
d2
d1
Quantity
P
R
I
C
E
Here supply remain fixed Here supply increased upto
certain limit then become
vertical.
d1
s

9. Short Period Long PeriodShort Period Long Period
s
sd1
d1
d
d
d2
d2
e2
e
e1
y
xo q2 q q1
Quantity
p2
p
p1
y
o x
p1
p
p2
N Q M Q1
Quantity
Q2
E
D
D
S
S
Price Price
Supply can be increased upto its
existing
Production capacity. Firm is continue
S
S D P
S D P