Price & Output Determination Under Perfect Competition

1. RASHTRASANT TUKADOJI MAHARAJ NAGPUR UNIVERSITY,
NAGPUR
DEPARTMENT OF COMMERCE
A
SEMINAR ON
‘PERFECT COMPITITION AND PRICE DETERMINATION’
SUBJECT: MANAGERIAL ECONOMICS
Presented by Guided by
1. Sachin B. Bhurase 1. Akhil Ramteke Sir
2. Kapil Bobate 2. Sheetal Nafde Madam
3. Mohini Navalkar

2. INTRODUCTION
 Perfect competition is a market where competition
among the sellers and buyers prevails in the most
perfectly form. In this market single market price
determined for a commodity by forces of total
demand and total supply. In this market all
participants is ‘price taker’ not a ‘price maker’.
 Definition:
According to Prof. Leftwitch,
‘Perfect competition is a market in which there
are many firms selling identical product with no
firms large enough relative to entire market to be
able to influence market price’.

3. FEATURES OF PERFECT COMPETITION
1. Large number of buyers and sellers
2. Homogeneous product
3. Free entry and exit
4. Perfect knowledge of market
5. Uniform price
6. Mobility of factors of production
7. No transport costs
8. No government interference

4. PRICE DETERMINATION UNDER PERFECT
COMPETITION
Price
(in ₹)
Total
Demand
(in kg.)
Total
Supply
(in kg.)
5 250 50
10 200 100
15 150 150
20 100 200
25 50 250

5.  A Firm in Equilibrium earns super normal profit, when
average revenue (price per unit) determined by the
Industry is more than its short-run average cost (SAC)
 Firm equilibrium point=E, where MR (=AR) = SMC
 Equilibrium output=OM
 Since AR(EM)>SAC(AM)
Firm is earning EA super
normal profit per unit of
output
Total super normal profit
=Total Revenue-Total Cost
=(EM×OM)-(AM×OM)
=EMOP-AMOB=EABP
=Shaded area
Super-Normal Profits : AR>SAC
5
Cost/Revenue
M
A
O
SAC
SMC
AR=MR
Output
Super Normal Profit
EP
B

6.  A Firm in Equilibrium earns normal profit, when average
revenue (price per unit) determined by the Industry is
equal to its short-run average cost (SAC)
 Firm equilibrium point=E, where MR (=AR) = SMC
 Equilibrium output=OM
 At this output AR and SAC
both are equal to EM and
Firm is earning normal
profit per unit of output
 It results in no gain in
terms of money for an
entrepreneur as this
profit is included in the
cost of production
Normal Profits : AR=SAC
6
Cost/Revenue
MO
SAC SMC
AR=MR
Output
EP

7.  A Firm may continue production even if it is incurring
losses because in sort run, it can’t leave the Industry
 Obviously in this situation of loss, a Firm will be in
equilibrium at that level of output where it gets the
minimum losses i.e. when
SAC is more than AR
 At equilibrium AR=EM and
SAC=AM and also from
graph AR<SAC
 Firm’s per unit loss=AE
i.e. (AM-EM)
Total loss
=Total Cost-Total Revenue
=(AM×OM)-(EM×OM)
=AMOB-EMOP=EABP
 Even if Firm discontinues
the production, it will have
to bear the loss of fixed
cost which is minimum
possible loss of a Firm
Minimum Loss : AR<SAC
7
Cost/Revenue
MO
SAC
SMC
AR=MR
Output
EP
AB
Loss

8. 8