Question

Write explanatory answer.

Define perfect competition and explain price determination under perfect competition.

Answer 1

Meaning: -A perfect competition is a market situation where there are large number of buyers and sellers buying and selling homogeneous products at single uniform price. Perfect competition is an idealistic concept and not a real one. Perfect competition may be applicable to certain products and that too for a certain period, and may be in a selective part of the market.

Price Determination under Perfect Competition

Equilibrium price: Equilibrium price is the price at which quantity demanded is equal to quantity supplied. The price of the product under perfect competition, is influenced by both buyers and sellers and equilibrium price is determined by the interaction of demand and supply forces. According to Marshall, demand and supply are like two blades of a pair of scissors. Just as cutting of cloth is not possible with the use of one blade, the equilibrium price of a commodity cannot be determined, either by the forces of demand or by supply alone. Both together determine the price.

We can study this with the help of the following table and graph.

                            Table No. 5.1 – Demand and Supply Schedule

Price (`) Per Unit	Quantity Demanded (Units)	Quantity Supplied (Units)
5	100	500
4	200	400
3	300	300
2	400	200
1	500	100

Above table shows the effect of price on market demand and market supply. The table shows that when price of the commodity is  5, quantity demanded is 100 units and quantity supplied is 500 units. Since supply is more than demand, price falls to  4/- and ` 3/-, respectively and quantity demanded extends to 200 and 300 units whereas supply contracted to 400 and 300 units, respectively. It is seen that quantity demanded and that quantity supplied both are equal at ? 3 where quantity demanded is 300 units whereas quantity supplied is 300 units. Thus,  3 will be an equilibirim price.

If further price falls to  2 and ` 1, quantity demanded will expand to 400 and 500 units, respectively and quantity supplied will contract to 200 and 100 units respectively. Since demand is more than supply, competition among buyers will increase and price will rise up to  2 and  3. Thus equilibrium price will be  3 per unit because demand and supply both are equal at this price.

E     -    Equilibrium point

OP   -    Equilibrium price

OQ   -    Equilibrium quantity demanded and supplied

On the 'x' axis we measure quantity demanded and quantity supplied and on the 'y' axis we measure price of the commodity. In the above diagram 'DD' is a downward slopping demand curve indicating inverse relationship between price and quantity demanded. 'SS' is an upward slopping supply curve indicates direct relationship between price and quantity supplied. Both the curve intersects each other at point 'E'. At this point the equilibrium price is ` 3/- and equilibrium demand and supply is 300 units.