Learning objectives

 The students will be able to :

 understand the concept of market and its
different forms.
 To discuss the features of perfect competition
 develop skills of constructing of supply
schedule and diagrams.
Competence:
independent learning, problem solving and
entrepreneurship.
Values: Honesty, Care
 https://www.investopedia.com/terms/p/p
erfectcompetition.asp
 Quiz

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FORMS OF MARKET
Perfect Competition
 It is a form market where there is large
number of buyers and sellers of a
commodity. Homogeneous product is
sold and its price is determined by
market forces of demand and supply. An
individual buyer or seller has no control
over price.
 Forms of market

Forms of market

Perfect Monopolistic
Competition Monopoly Oligopoly
Competition
Features of perfect competition
 Large number of sellers and
buyers
 Homogeneous Products
 Free entry and exit of firms
 Perfect Knowledge about the
market .
 Demand Curve and revenue curves
under perfect competition.
 PERFECT COMPETITION- Features
➢ Large number of sellers
• The words ‘large number’ simply states that the number of sellers is large
enough to render a single seller’s share in total market supply of the
product is insignificant.
• Insignificant share means that if only one individual firm reduces or
raises its own supply, the prevailing market price remains unaffected.
• The prevailing market price is the one which was set through the
intersection of market demand and market supply forces, for which all the
sellers and all the buyers together are responsible.
• One single seller has no option but to sell what it produces at this market
determined price. This position of an individual firm in the total market is
referred to as price taker. This is a unique feature of a perfectly
competitive market.
➢ Large number of buyers
• The words ‘large number’ simply states that the number of buyers is
large enough, that an individual buyer’s share in total market demand is
insignificant, the buyers cannot influence the market price on his own by
changing his demand.
• This makes a single buyer also a price taker.
To sum up, the feature “large number” indicates ineffectiveness of a single
seller or a single buyer in influencing the prevailing market price on its
own, rendering him simply a price taker.
➢ Homogeneous Products:
▪ Product sold in the market are homogeneous, i.e., they are identical
in all respects like quality, colour, size, weight, design, etc.
▪ The products sold by different firms in the market are equal in the
eyes of the buyers.
▪ Since, a buyer cannot distinguish between the product of one firm
and that of another, he becomes indifferent as to the firms from which
he buys.
▪ The implication of this feature is that since the buyers treat the
products as identical they are not ready to pay a different price for the
product of any one firm. They will pay the same price for the products
of all the firms in the industry. On the other hand, any attempt by a
firm to sell its product at a higher price will fail. To sum up, the
“homogenous products” feature ensures a uniform price for the
products of all the firms in the industry.
 Free entry and exit of firms:
(i) Buyers and sellers are free to enter or leave the market at any time
they like. New firms induced by large profits can enter the industry
whereas losses make inefficient firms to leave the industry.
(ii) The freedom of entry and exit of firms has an important
implication. This ensures that no firm can earn above normal profit in
the long run. Each firm earns just the normal profit, i.e., minimum
necessary to carry on business.
(iii) Suppose the existing firms are earning above normal profits, i.e.
positive economic profits. Attracted by the positive profits, the new
firms enter the industry. The
industry’s output, i.e. market supply, goes up. The prices come down.
New firms continue to enter and the prices continue to fall till
economic profits are reduced to zero.
(iv) Now suppose the existing firms are incurring losses. The firms
start leaving. The industry’s output starts falling, prices going up, and
all this continues till losses are wiped out. The remaining firms in the
industry then once again earn just the normal profits.
(v) Only zero economic profit in the long run is the basic outcome of a
perfectly competitive market.
 Perfect Knowledge about the market:

(i) Perfect Knowledge means both buyers and sellers are fully informed about the
market.
(ii) The firms have all the knowledge about the product market and the input markets.
Buyers also have perfect knowledge about the product market.
(iii) The implication of perfect knowledge about the product market is that any attempt
by any firm to charge a price higher than the prevailing uniform price will fail. The
buyers will not pay because they have perfect knowledge. A uniform price prevails in
the market.
(iv) Regarding the knowledge about the input markets the implicit assumption is that
each firm has an equal access to the technology and the inputs used in the
technology.
(ii) No firm has any cost advantage. Cost structure of each firm is the same. All the
firms have a uniform cost structure.
(vi) Since there is uniform price and uniform cost in case of all firms, and since profit
equals revenue less cost, all the firms earn uniform profits.

 Perfect mobility:

(i) There is perfect mobility in the market both for goods and factors of production.
(ii) There should be no restriction on their movement. Goods can be sold at any place.
(iii) Similarly, factors of production can freely move from one place to another or from
one occupation to another.
(j) Absence of transportation and selling cost.
(i) In perfect competition, it is assumed that there is no transport cost for consumers
who may buy from any firm and also there is no selling cost.
(ii) This insures existence of a single uniform price of the product.
 Demand Curve and revenue curves under perfect competition:
 (a) As we know, in perfect competition homogeneous goods are
produced. So, price remains constant, which makes the demand curve
perfectly elastic.
(b) In perfect competition, homogeneous goods are produced, that is
why price remains constant, as price = AR, it means AR remains
constant. And if, AR remains constant, then AR = MR .
independent learning, problem solving and
entrepreneurship.
Plenery :
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4k1snthb
MARKET EQULIBRIUM
 (i) In the given schedule market equilibrium is determined at Price Rs. 3 where
Market demand is equal to Market Supply.
(ii) At price 1 and 2, there is excess demand, which leads to rise in price,
resulting tendency is expansion in supply.
(iii) Similarly, at price 4 and 5, there is excess supply, which leads to fall in price,
resulting tendency is Contraction in supply.
(i) In the given diagram, price is measured on vertical axis, whereas quantity : demanded
and supply is measured on horizontal axis.
(ii) Suppose that initially the price in the market is P1. At this price, the consumer demand P1B
and the producer supply P1A, i.e. consumers want more than what the producer are willing to
supply. There is excess demand equal to AB. So, price cannot stay on P1 as excess demand
will create competition among the buyers and push the price up till we reach equilibrium. Due
to rise in price from P1 to P2 there is upward movement along the supply curve (expansion in
supply) from A to E and upward movement along the demand curve (contraction in demand)
from B to E.
(iii) Similarly, at price supplied P2L. There is excess supply, equal to KL, which will create
competition among the sellers and lower the price. The price will keep falling as long as there
is an excess supply.
Due to fall in price from P2 to P there is downward movement along the supply curve
(contraction in supply) from L to E and downward movement along the demand curve
(expansion in demand) from K to E.
(iv) The situation of zero excess demand and zero excess supply defines market equilibrium
(E). Alternatively, it is defined by the equality between quantity demanded and quantity
supplied. The price P is called equilibrium price and quantity Q is called equilibrium quantity.
Effect of Change in Equilibrium due to Increase and
Decrease in Demand and Supply
 Case I: Increase in Demand
1. An increase in demand leads to rightward shift of demand curve
as shown in the figure below. When demand increases, then
shifting should be such that initial price remains constant. It is so
because increase in demand is the part of the shift in demand in
which other factor changes and price remains constant.
 We assume that initial price is OP and equilibrium quantity is OQ as
shown in the diagram.
 due to increase in demand the demand curve shifts rightward from
DD to D1D1.
 With new demand curve D1D1, there is excess demand at initial price
OP because at price OP1 demand is PB and supply is PA, so there is
excess demand of AB at price OP.
 Due to this excess demand, competition among the consumer will
rise the price. With the rise in price, there is upward movement along
the demand curve (contraction in demand) from B to C and similarly,
there is upward movement along the supply curve (expansion in
supply) from A to C .
 So, finally equilibrium price rises from OP to OP1, and equilibrium
quantity also rises from OQ to OQ1
 Due to increase in demand,
(i) Equilibrium price rises from OP to OP1
(ii) Equilibrium quantity also rises from OQ to OQ1
Case II: Decrease in Demand

A decrease in demand leads to leftward shift of demand curve as shown in the

below figure:
When demand decreases, then shifting should be such that initial price remains
constant. It is so because decrease in demand is the part of the shift in demand in
which other factor changes and price remains constant.
 With new demand curve D1D1, there is excess supply at initial
price OP because at price OP demand is Pre and supply is PA
so there is excess supply of AB at price OP.
Due to this excess supply, competition among the producer will
make the price fall.
 Due to fall in price there is downward movement along the
demand curve (Expansion in demand) from B to C and similarly
there is downward movement along the supply curve
(contraction in supply) from A to C. So, finally, the equilibrium
price falls from OP to OP1 and equilibrium quantity also falls
from OQ to OQ1.

Conclusion
Due to decrease in demand,
(i) Equilibrium price falls from OP to OP1.
(ii) Equilibrium quantity also falls from OQ to OQ1.
 Case III: Increase In Supply
An increase in supply leads to rightward shift of supply curve as shown in the below
figure:

When supply increases, then shifting should be such that initial price remains
constant. It is so because increase in supply is the part of the shift in supply in which
other factor changes and price remains constant.
 We assume that initial price is OP and equilibrium quantity is OQ.
 In the above figure price is on vertical axis and quantity demanded and
supplied is on horizontal axis. But due to increase in supply.
 The supply curve shifts rightward from SS to S1S1. With new supply
curve S, S, there is excess supply at initial price OP.
 Due to this excess supply competition among the producer will make
the price fall. Due to this fall in price there is downward movement
along the supply curve (Contraction in supply) and similarly, there is
downward movement along the demand curve (Expansion in demand).
So, finally, equilibrium price falls from OP to OP1 and equilibrium
quantity rises from OQ to OQ1
Conclusion
Due to increase in supply,
(i) Equilibrium price falls from OP to OP1.
(ii) Equilibrium quantity rises from OQ to OQ1.
 Case IV: Decrease in Supply
A decrease in supply leads to leftward shift of supply curve as shown in the
below figure:

When supply decreases, then shifting should be such that initial price remains
constant. It is so because decrease in supply is the part of the shift in supply in
which other factor changes and price remains constant.
 We assume that initial price is OP and equilibrium quantity is OQ.
In the above figure price is on vertical axis and quantity demanded
and supplied is on horizontal axis.
 But due to decrease in With new supply curve S1S1 , there is excess
demand at initial price OP.
 A fall in supply will shift the supply curve to the left. These causes a
situation of deficiency of supply (or a situation of excess demand).
Accordingly, price tends to rise. In response to rise in price,demand
tends to contract and supply tends to extend.This process (of
contraction of demand and extension of supply) will continue till,
price is reached where quantity demanded is equal to quantity
supplied. This occurs at new equilibrium point E1.So, finally,
equilibrium price rises from OP to OP1 and equilibrium quantity falls
from OQ to OQ1.

Conclusion
Due to decrease in supply,
(i) Equilibrium price rises from OP to OP1
(ii) Equilibrium quantity falls from OQ to OQ1
 Simultaneous Increase and Decrease in
Demand and Supply
Case I: Both Demand and Supply Increases: When both demand and supply
increases, then there are three possibilities:
Case A: When Demand and Supply both Increase at the Same Rate
1. When demand and supply both increase at the same rate, equilibrium price
remains constant and equilibrium quantity rises. It can be shown with the help of
the following diagram.
 Case B: When demand increases, supply also increases but at a
much faster rate . When demand increases, supply also increases but
at a much faster rate, then equilibrium price falls and equilibrium
quantity rises as shown below:
Case C: When supply increases, demand also increases but at a much faster
rate
When supply increases, demand also increases but at a much faster rate, then
equilibrium price rises and equilibrium quantity rises as shown below:
 Case II: Both Demand and Supply Decreases: When both demand
and supply decreases, then there are three possibilities:
Case A: When Demand and Supply both Decrease at the Same Rate
When demand and supply both decrease at the same rate,
equilibrium price remains constant and equilibrium quantity falls as
shown below:
Case B: Decrease in Demand > Decrease in Supply:
When decrease in demand is proportionately more than decrease in supply, then
leftward shift in demand curve from DD to D1D1 is proportionately more than leftward
shift in supply curve from SS to S1S1 (Fig. 11.11). The new equilibrium is determined
at E1, equilibrium price falls from OP to OP1 and equilibrium quantity falls from OQ to
OQ1.
Case C: Decrease in Demand < Decrease in Supply:
When decrease in demand is proportionately less than decrease in supply, then
leftward shift in demand curve from DD to D1D1 is proportionately less than
leftward shift in supply curve from SS to S1S1 . The new equilibrium is
determined at E1 equilibrium quantity falls from OQ to OQ1 whereas, equilibrium
price rises from OP to OP1.
Simple Applications Of Tools Of Demand And Supply

Price Ceiling (Maximum Price Ceiling)

When the government imposes upper limit on the price (maximum price) of
a good or service which is lower than equilibrium price is called price ceiling.
➢ Price ceiling is generally imposed on necessary items like wheat, rice, kerosene
etc.

In the above diagram, DD is the market demand curve and SS is the market
supply curve of Wheat.
➢ Suppose, equilibrium price OP is very high for many individuals and they are
unable to afford at this price.As wheat is necessary product, government has to
intervene and impose price ceiling of Pt, which is below the equilibrium level.
➢ When the government fixes the price of a commodity at a level lower than the
equilibrium price (say it fixes the price at OP1, there would be a shortage of the
commodity in the market. Because at this price demand exceeds supply. Quantity
demanded is P1S, while quantity supplied is only P1R.
➢ There is, thus, a shortage of RS quantity at this price (i.e., OP1). In free market,
this excess demand of RS would have raised the price to the equilibrium level of
OP. But, under government price-control consumers’ demand would remain
unsatisfied.
➢ Though the intension of the government was to help the consumers, it would end
up creating shortage of wheat.To meet this excess demand, government may use
Rationing system. Under rationing system, a certain part of demand of the
consumers is met at a price lower than the equilibrium price.
➢ Under this system, consumers are given ration coupons/ Cards to buy an essential
commodities at a price lower than the equilibrium price from Fair price/Ration
Shop. Rationing system can create the problem of black market, under which the
commodity is bought and sold at a price higher than the maximum price fixed by
the government.
Price Floor (Minimum Price Ceiling)
When the government imposes lower limit on the price (minimum price) that may be
charged for a good or service which is higher than equilibrium price is called price
floor.
Price Floor is generally imposed on agricultural price support programmes.
Agricultural price support programmes: Through an agricultural price support
programme, the government imposes a lower limit on the purchase price for some of
the agricultural goods and the floor is normally set at a level higher than the market—
determined price for these good.
 In the given diagram, DD is the market demand curve and SS is the
market supply curve of Wheat.
Suppose, equilibrium price OP is not so profitable for farmers, who
have suppose just faced Drought.
 To help farmers government must intervene and impose price floor of
P1; which is above than equilibrium price.
 Since, the price P1 is above the equilibrium price P1 the quantity
supplied P1B exceeds the quantity .Quantity Demanded and
demanded P1A. There is excess supply. Supplied of Wheat.
In case of excess supply, farmers of these commodities need not sell
at prices lower than the minimum price fixed by the government.
 The surplus quantity will be purchased by the government. If the
government does not procure the excess supply, competition among
its sellers would bring down the price to the level of equilibrium price.