Transcript price determination

PRICE DETERMINATION
UNDER
PERFECT COMPETITION
PERFECT COMPETITION
Perfect Competition is that situation of the
market wherein there are large number of
Buyers and sellers of a homogeneous product
and the price of such a product is determined
by the market forces i.e ,the industry. All
firms sell the product at this price. In other
words , there prevails only one price of a
product in the market
ASSUMPTIONS
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Many buyers/Many Sellers – Many consumers with
the willingness and ability to buy the product at a certain
price, Many producers with the willingness and ability to
supply the product at a certain price.
Homogeneous Products – The products of the
different firms are EXACTLY the same, e.g. fruit.
Low-Entry/Exit Barriers – It is relatively easy to enter
or exit as a business in a perfectly competitive market.
Perfect Information - for both consumers and
producers
Firms Aim to Maximise Profits - Firms aim to sell
where marginal costs meet marginal revenue, where
they generate the most profit.
PRICE UNDER PERFECT
COMPETITION
SUPPLY PRICE DEMAN
OF
PER
D FOR
GOOD- UNIT GOODX
X
50
5
10
40
4
20
30
3
30
20
2
40
10
1
50
Y
D
P
Industry
surplus
E
S
Equilibrium
Price
Price
Shortage
S
o
D
Q
Quantity
Equilibrium price is determined at that point at which aggregate demand of
commodity is equal to aggregate supply.
x
Effect of Change in Supply on Price
Effect of change in Demand on Price
y
y
d1
p1
Price
s1
e1
d
e
d2
p
d1
e2
p2
Price
d
p1
p
p2
d
d2
o
q2
q
q1
e1
s2
e
e2
s1p
2 s
d
s2
x
o
q1
Quantity
D P
s
q
q1
Quantity
S
P
x
Time Element
Very Short
Period
Market
Price
Short Period
Sub Normal
Price
Long Period
Very Long
Period
Normal
Price
Trade
Cycle
DETERMINATION OF MARKET
PRICE OR VERY SHORT PERIOD
EQUALIBRIUM
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MARKET PRICE: Price of commodity which
prevails in a market at a particular time.
There are two types of Goods in the market
as:Perishable Goods
Durable Goods
Perishable Goods
y
d2
p1
p
p2
d
d1
d1
y
s
P
R
I
C
E
e1
e
e2
d2
o
Durable Goods
d
s
Quantity
Here supply remain fixed
d
e1
p1 d2
p
e
e2
p2
d1
S
s
d
d1
d2
x
o
x
q2 q
q1
Quantity
Here supply increased upto
certain limit then become
vertical.
Short Period
y
d
y
s
d1
e1
p1 d2
Price p
e2
p2
Long Period
p1
e
Price
S
s
d1
E
p
d
q2 q q1
Quantity
D
p2
S
d2
o
S
x
Supply can be increased upto its existing
Production capacity. Firm is continue to
produce in the short period even when it
o
D
Q2 N Q M Q1
Quantity
S
D
P
S
D
P
x