Published by: Sayuja Koirala
Published date: 30 Jul 2024
Perfect competition is defined as the market structure where there is a large number of buyers and sellers within the homogeneous products, selling at a uniform price. In this market, both buyers and sellers have perfect knowledge regarding price. Firms can not change prices according to different situations. The price of the product is determined by the industry and all firms under the industry have to accept the price determined by the industry. Therefore, the industry is called the price maker and the firm is called the price taker. In a perfect competition market, the seller can sell any amount of the commodity at the ruling price or existing price.
1. Large Number of Buyers and Sellers: In a perfectly competitive market, there are numerous buyers and sellers. This large number ensures that no single buyer or seller can control the market price.
2. Homogeneous Goods: All firms in a perfectly competitive market produce goods that are identical or homogeneous. This means that consumers view products from different firms as perfect substitutes.
3. Free Entry and Exit: Firms in a perfectly competitive market can enter or leave the industry freely. There are no barriers to entry or exit, which means that new firms can join the market when they see a profit opportunity, and existing firms can leave the market if they are incurring losses.
4. No Government Intervention: In a perfect competition scenario, government intervention is absent. Prices are determined purely by the forces of supply and demand.
5. Perfect Mobility of Factors of Production: Factors of production, such as labour and capital, can move freely in and out of the industry. There are no restrictions or barriers to the movement of resources, which allows firms to adjust their production levels in response to market conditions easily.
6. Perfect Knowledge of the Market: Buyers and sellers have complete and perfect knowledge about the market. This includes information about the prices of goods and services, availability of products, and the cost structures of the firms.
7. Profit Maximization Objective: The primary goal of all firms in a perfectly competitive market is to maximize their profits. Firms aim to produce at a level where their marginal cost equals marginal revenue, ensuring that they are operating efficiently.
Monopolistic competition is a type of market structure where many firms compete against each other, but each firm sells a slightly differentiated product. This differentiation allows firms to have some degree of market power, enabling them to set prices above marginal cost. Unlike perfect competition, where products are identical, firms in monopolistic competition focus on product differentiation to attract customers.
1. Large Number of Firms: Many firms operate in the market, each holding a small market share. This ensures that no single firm can control the entire market.
2. Product Differentiation: Firms sell products that are similar but not identical. Each firm tries to differentiate its product through branding, quality, features, or other attributes, creating a unique product identity.
3. Free Entry and Exit: Firms can freely enter or exit the market. This means that if firms are earning abnormal profits, new entrants will join the market, increasing competition and driving profits down. Conversely, if firms are incurring losses, they can leave the market.
4. Some Degree of Market Power: Due to product differentiation, each firm has some control over its pricing. Firms are price makers to a certain extent because consumers may prefer their product over others due to its unique features.
5. Non-Price Competition: Firms often compete using non-price factors such as advertising, branding, product features, customer service, and packaging to attract customers and gain market share.
The total amount of money received by a firm from the sale of the product is called revenue. The profit of a firm depends upon the cost and revenue. The profit earned by the firm is the difference between the revenue and the cost of production.
There are three types of revenue which can be explained as follows:
1. Total revenue (TR)
Total revenue is the total amount of money received by a firm from the sales of a given quantity of product. Technically, total revenue is the sum of marginal revenues. Mathematically, total revenue is the product of price and quantity sold.
Symbolically;
TR=∑MR
or
TR=P×Q
Where,
TR= Total Revenue
∑MR= Sum of Marginal Revenues
P=price per unit
Q= Quantity sold
2. Average revenue (AR)
Average revenue is the price per unit. Average revenue is obtained by dividing the total revenue by the total number of quantities sold.
Symbolically;
AR=TR/Q
Where,
AR= Average Revenue
TR= Total revenue
Q= Quantity sold
3. Marginal Revenue(MR)
Marginal revenue is the addition to the total revenue from the sales of an additional unit of a commodity. Marginal revenue is obtained by dividing the change in total revenue by the change in quantity sold.
Symbolically,
MR= ∆TR / ∆Q
Where,
∆TR =Change in TR
∆Q= Change in quantity sold
OR
MR=TRn -TRn-1
Where,
TRn = Current Total Revenue
TRn-1 = Initial Total Revenue