What are the characteristics of a perfectly competitive market?
This type of market structure refers to the market that consists of a larger number of buyers and also a large number of sellers. No buyers and also a large number of sellers. No individual seller is able to influence the price of an existing product in the market. All sellers in a perfect competition produce homogenous outputs i.e. the outputs of all the sellers are similar to each other and the products are uniformly priced.
Features of perfectly competitive market
The main features of perfectly competitive market are:
1. A larger number of buyers and sellers
There exist a larger number of buyers and sellers in a perfectly competitive market. The number of sellers is so large that no individual firm owns the control over the market
price of a commodity. Due to the large number of sellers in the market there exists a perfect and free competition. A firm acts as a price taker while the price is determined
by the invisible hands of market i.e. by demand for and supply of goods. Thus we can conclude that under perfectly competitive market an individual firm is a price taker and
not a price maker.
2. Homogenous products
All the firms in a perfectly competitive market produce homogeneous products. This implies that the output of each firm is perfect substitute to others output in terms of
quantity quality colour size features etc. this indicates that the buyers are indifferent to the output of different firms. Due to the homogeneous nature of products existence of
uniform price is guaranteed.
3. Free exit and entry of firms
In the Long run these is free entry and exit of firms. However in the short run some fixed factors obstruct the free entry and exit of firms. This ensures that all the firms in
the long-run earn normal profit or zero economic profit that measures the opportunity cost of the firms either to continue production or to shut down. If there are abnormal
profits new firms will enter the market and if there are abnormal losses a few existing firms will exit the market.
4. Perfect knowledge among buyers and sellers
Both buyers and sellers are fully aware of the market conditions such as price of a product at different places. The sellers are also aware of the prices at which the buyers
are willing to buy the product. The implication of this feature is that if any individual firm is charging higher or lower price for a homogeneous product the buyers will shift their purchase to other firms or shift their purchase from the firm to other firms selling at lower price.
5. No transport costs
This features means that all the firms have equal access to the market. The goods are produced and sold locally. Therefore there is no cost of transporting the product from
one part of the market to other.
6. Perfect mobility of factors of production
There exists geographically and occupationally perfect mobility of factors of production. This implies that the factors of production can move from one place to other and can
move from one job to another.
7. No promotional and selling costs
There are no advertisements and promotional costs incurred by the firms. The selling costs under perfectly competitive market are zero.
The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
How does the imposition of a unit tax affect the supply curve of a firm?
What is the supply curve of a firm in the long run?
What is the relation between market price and average revenue of a price-taking firm?
What is the relation between market price and marginal revenue of a price-taking firm?
How does an increase in the number of firms in a market affect the market supply curve?
Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs 10.
Quantity Sold | TR | MR | AR |
---|---|---|---|
0 1 2 3 4 5 6 |
How does an increase in the price of an input affect the supply curve of a firm?
Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.
Explain the concept of a production function
What would be the shape of the demand curve so that the total revenue curve is?
(a) A positively sloped straight line passing through the origin?
(b) A horizontal line?
Explain market equilibrium.
Discuss the central problems of an economy.
What do you mean by the budget set of a consumer?
What is the total product of input?
From the schedule provided below calculate the total revenue, demand curve and the price elasticity of demand:
Quantity |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Marginal Revenue |
10 |
6 |
2 |
2 |
2 |
0 |
0 |
0 |
- |
When do we say that there is an excess demand for a commodity in the market?
What do you mean by the production possibilities of an economy?
What is budget line?
Briefly explain the concept of the cost function.
What do you mean by substitutes? Give examples of two goods which are substitutes of each other.
What are the average fixed cost, average variable cost and average cost of a firm? How are they related?
List the three different ways in which oligopoly firms may have.
What will happen if the price prevailing in the market is?
i. Above the equilibrium price
Ii. Below the equilibrium price
Suppose the demand and supply curve of commodity XX in a perfectly competitive market are given by:
qD =700 - p
qs = 500 + 3p for p ≥ 15
= 0 or 0 ≤ p <15
Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than Rs 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?
A monopoly firm has a total fixed cost of Rs 100 and has the following demand schedule:
Quantity |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Marginal Revenue |
100 |
90 |
80 |
70 |
60 |
50 |
40 |
30 |
20 |
10 |
Find the short run equilibrium quantity, price and total profit. What would be the equilibrium in the long run? In case the total cost is Rs.1000, describe the equilibrium in the short run and in the long run.
What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?
Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?
Explain why the budget line is downward sloping.