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perfect competition in market (macroeconomics)

 
 
Reply Sun 12 Jan, 2014 12:35 pm
Definition:
a market situation in which there exists a homogeneous product, freedom of entry, and a large number of buyers and sellers none of whom individually can affect price.
FEATURES:
(1) Large number of firms. The basic condition of perfect competition is that there are large number of firms in an industry. Each firm in the industry is so small and its output so negligible that it exercises little influence over price of the commodity in the market. A single firm cannot influence the price of the product either by reducing or increasing its output. An individual firm takes the market price as given and adjusts its output accordingly. In a competitive market, supply and demand determine market price. The firm is price taker and output adjuster.

2-No barriers to entry. The firms in a competitive market have complete freedom of entering into the market or leaving the industry as and when they desire..
3- Profit Maximization
In such a situation, firms have only one motive in front of them, that is maximizing the profits.
4-Infinite buyers and sellers – An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.
5-COMPLETE INFORMATION Consumers have perfect information about the prices all sellers in the market charge – so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm
6-The product is homogeneous. Another provision of perfect competition is that the good produced by all the firms in the industry is identical. In the eyes, of the consumer, the product of one firm (seller) is identical to that of another seller.
7-THERE IS NO INTERFERENCE OF GOVERNMENT
8-No externalities in production and consumption so that there is no divergence between private and social costs and benefits
9-•Perfectly mobile factors of production – land, labour and capital can be switched in response to changing market conditions, prices and incentives.
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Type: Question • Score: 2 • Views: 964 • Replies: 2
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neologist
 
  1  
Reply Sun 12 Jan, 2014 09:04 pm
@lavania roay,
Have you read anything by Adam Smith?
For his day, he had a good model.
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Linkat
 
  1  
Reply Thu 16 Jan, 2014 11:35 am
@lavania roay,
sounds like homework to me.
0 Replies
 
 

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