Q.Explain the price determination under perfect competition market.

In a perfectly competitive market the price of a commodity is settled at the point where the industry's demand curve and supply curve intersect — the equilibrium price. At this price the quantity demanded equals the quantity supplied. Each firm is a price taker and faces a horizontal (perfectly elastic) demand curve at that price. Marshall analysed this over three time periods: market period, short run and long run. ## Features of perfect competition - Very large number of buyers and sellers, each too small to affect price. - Homogeneous (identical) product. - Free entry and exit of firms. - Perfect knowledge of the market. - Perfect mobility of factors of production. - No transport cost. Because of these features a single uniform price prevails, and the firm is a price taker while the industry (market) is the price maker. ## Role of demand and supply - Market demand is the sum of the demands of all consumers; it slopes downward (law of demand). - Market supply is the sum of the supplies of all firms; it slopes upward (direct relation with price). The equilibrium price is determined where market demand equals market supply. At a higher price supply exceeds demand (surplus), pulling price down; at a lower price demand exceeds supply (shortage), pushing price up. The price settles where the two forces balance — the equilibrium price. ## Equilibrium of the firm Given the market price, the firm's demand curve is a horizontal straight line (price = Average Revenue = Marginal Revenue). The firm produces that output at which Marginal Cost = Marginal Revenue (= Price) and MC cuts MR from below. The firm cannot change the price; it can only decide how much to produce. ## Time element in price determination (Marshall) Marshall showed that the relative influence of demand and supply on price depends on time: - Market period (very short run): supply is fixed (stock already produced cannot be changed). Price is governed mainly by demand. For perishable goods price is set almost entirely by demand. - Short period (short run): supply can be varied only by changing the variable factors (existing plants worked more or less). Both demand and supply influence price, demand still being the more active force. The firm may earn supernormal profit or incur loss. - Long period (long run): supply can be fully adjusted as firms enter or leave and plants are changed. Supply has full play, so cost of production (supply) governs the normal price. In long-run equilibrium price = minimum average cost and firms earn only normal profit. ## Diagrammatic idea If the market demand curve DD an …