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PURE AND PERFECT COMPETITION: Main Features 1. There are a large number of imdifferentiated buyers and sellers.

Each seller must be small and the quantity supplied by any one of the sellers must be so insignificant that no increase or decrease in his output can appreciably affect the total supply and the market price. So also, each buyer must be small and the quantity bought by any of the buyers should be so insignificant that no increase or decrease in his purchases can appreciably affect the total demand and the price. As a result, each seller will accept the market price as it is. So also each buyer will regard the price as dete-rmifred by forces beyond his control. The firm in perfect competition is essentially a price taker. 2. Each competitor offers or seeks exactly a similar thing as do the others. There is nothing to distinguish one from the other so that one could be substituted for the other if the price is lower. Again, the commodity dealt in must be supplied in quantity. 3. The market in which the commodity is bought and sold must be well organised, trading must be continuous and buyers and sellers must be so well informed that every unit bought or sold at any particular time will sell at the same price.1 4. There are many competitors (whether buyers or sellers), each acting independently. There must be no restraint upon the independence of any seller or buyer, either by custom, contract, collusion, and fear of reprisals by the competitors, or by the imposition of Government control. 5. The market price must bejlexible over a period of time, constantly rising or falling in response to the changing conditions of supply and demand. 6. There should be no obstacle to the entry and to the withdrawal of the firms in the industry concerned. All firms have equal access to production technologies and techniques. There are no patents, proprietary designs or special skills that allow an individual firm to do the job better than its competitors. Firms also have equal access to all their inputs which are available on similar terms. Thus, perfect competition is an extreme case and is rarely to be found. Actual competition always departs from the ideal of perfection. Perfect competition is a mere concept, a standard by which to measure the varying degrees of imperfect competition. Sometimes, a distinction is made between perfect competition and pure competition. In that case pure competition is said to exist where only two conditions are fulfilled, viz., (1) there must be a large number of firms in the industry, and (2) the products of the firms must be homogeneous.2 But the line of distinction drawn between the two is very fine. That is why, many economists have preferred to use the two terms synonymously. For managerial purposes, therefore, there does not seem to be any difference between the two. The underlying presumption in free competition (close to perfect competition) is that it operates in the social interest unless the contrary can be proved, since it provides on The 2001 Nobel Prize for Economics was won by George Akerlof, Michael Spence and Joseph Stiglitz on 'Asymmetry of Information'. Imperfections of information are caused by the fact that different people in a market know different things. For example, the seller of a car may know more about his car than the buyer; the buyer of insurance may know more about his prospects of having an accident (such as how he drives) than the seller; a worker may know more about his ability than a prospective employer; a borrower may know more about his prospects of repaying a loan than the lender. But asymmetries of information are only one facet of information imperfections 4nd all of

them can have large consequences. Joseph Sliglitz in the Economic Times December 7, 2001. ''Stonier and Hague have stated a third condition of pure competition as well, free entry, Le., any one who wishes to enter the industry must be allowed to do so. See A Textbook of Economic Theory, London, 1966, p. 25. On this point, however, there seems to be a difference of opinion, e.g., Glair Wilcox states that in pure competition "minor obstacles may limit access to and withdrwal PERFECT COMPETITION effective check on the power of a seller to make or fix the terms (usually the price) on which he will sell. Competition, by providing the buyer with alternatives, safeguards the consumer against exploitation and makes it unnecessary for the State to intervene by regulating prices and production in order to protect him. DETERMINATION OF PRICE As is popularly known, prices under perfect competition are determined by the forces of supply and demand. Prices will be fixed at a point where the supply and demand are at an equilibrium. This is illustrated in Fig. 1. The equilibrium will change by changes in the forces of demand and supply. Price and Quantity Variability . ' Responses to a change in demand or to a change in upply may be primarily in price or primarily in quantity. If the demand Quantity is highly elastic, consumers will respond Fig. 1 readily to price changes by dropping out of the market when prices are raised a little and by coming in and increasing purchases when prices are lowered a little. As a result, most of the adjustments to changes in supply (an increase leading to a reduction in price and a decrease leading to an increase in price) will be adjustments in quantity purchased if the demand is highly elastic. If the demand is inelastic, the adjustments will take place primarily in price. Similarly, if sellers respond readily by greatly increasing their offerings on slight increases in price, or by heavy withdrawals on slight price drops, the adjustments to changes in demand will be largely in quantity exchanged. If sellers are quite unresponsive to price in their oiferings (if supply is very inelastic), the adjustments to changes in demand will take place largely through shifts in price. In view of the above, we may state the following rules and illustrate them: 1. If demand rises, price goes up and vice versa. For example, in Fig. 2, the demand curve shifts upwards and to the right from DD to D'D' whereas the supply curve remains the same. As a result, the price goes up from OP to OPj So also, the sales increase from OQ to OQ\. '

2. If supply rises, price goes down and vice versa. For example, in Fig. 3, the supply curve shifts downwards to the right from SS to S> while the demand curve remains unchanged. The result is that price falls from OP to OPj. But the sales increase from OP to OQi. 3. Given a shift in the demand curve, price will rise less or/all less if the supply curve is %; elastic (flat); price wHl rise more or fall more if the supply curve is inelastic (steep). If the rise in price is more, the rise in sales will be less; if the rise in price is less, tne rise in sales will be more. For example, in Fig. 4, the demand curve shifts from DD to D'D'. The .supply curve S"S" is steep. Another supply curve S'S' is rather flat. Both the stipply curves cut the original demand curve DD at point E meaning thereby that before the change in demand, price was OP. The steep supply curve S"S", however, cuts DTX curve at point Ej giving the equilibrium prices as OPj. The flat supply curve S'S' cuts the new demand curve DT> at E% giving the equilibrium price as OP2 which is less than

-S'

S'

Q Q,Q2 Quantity Fig. 4

Q Q"Q' Quantity Fig. 5

4. Given a shift in the supply curve, the price will rise less or fall less if demand curve is elastic; the price will rise more or fall more if demand curve is inelastic. For example, in Fig. 5, SS is the original supply curve, S'S' is the new supply curue, iyjy is the steep demand curve (indicating relatively inelastic demand) and D"D" is the flat D'. demand curve (indicating relatively elastic demand). The original equilibrium price is OP because SS curve cuts the aa and D"D" curve at p .3 point E. After the shift in the supply curve, however, the S'S' cuts the ULf curve at point E" giving Of as the equilibrium price but the S'S' cuve cuts the >"D" curve at point E" giving the equilibrium price as Q OF" which is higher than OP'. Q, Quan tity 5. If both demand and supply increase, sales axe bound Fig. 6 to increase but the price-may or may not rise. It will rise if the amount which would now be demanded at the old price exceeds the supply which would now be made at that old price (Fig. 6). But the price will fall if the amount which would now be supplied at the old price is more than the amount now demanded at that price {Fig. 7). In other words, if at the old price new demand exceeds the new supply, the price will rise but if the new demand is less than the new supply, the price will fall. 6. An increase in demand with a simultaneous decrease in supply will raise price and increase sales if the new demand price for the old equilibrium amount is higher than its new supply price. Similarly, the price will rise Fig.7 and sales will diminish if the new supply price for the old amount is higher than its new demand price (Fig. 8 and Fig. 9).

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