Question

Describe the characteristics of 'Perfectly Competitive Market'. Explain the determination of price in such market.

Hint:

In perfect competition, firms are price takers, meaning they must accept the market price and adjust production accordingly.

Answer 1

Step 1: Characteristics of a Perfectly Competitive Market.
A perfectly competitive market is a theoretical market structure where the following conditions hold: - **Large Number of Buyers and Sellers:** There are so many buyers and sellers in the market that no single buyer or seller can influence the market price. - **Homogeneous Products:** All firms produce identical or homogeneous products, so consumers cannot differentiate between the goods of different producers. - **Free Entry and Exit:** Firms can freely enter or exit the market without restrictions. This ensures that firms cannot earn long-term economic profits. - **Perfect Knowledge:** All buyers and sellers have complete knowledge about prices, products, and production techniques, ensuring informed decision-making. - **No Government Intervention:** There is no government intervention in the form of taxes, subsidies, or price controls in a perfectly competitive market.
Step 2: Price Determination in a Perfectly Competitive Market.
In a perfectly competitive market, the price is determined by the forces of supply and demand. Since firms are price takers, they accept the market price as given. The price determination process involves: - **Market Supply and Demand:** The intersection of the market supply curve (which shows the total quantity of goods firms are willing to produce at each price) and the market demand curve (which shows the total quantity of goods consumers are willing to buy at each price) determines the equilibrium price. - **Firm's Supply Curve:** In the short run, a firm's supply curve is its marginal cost curve above the average variable cost (AVC) curve. In the long run, firms can adjust all inputs, and the price tends to equal the minimum point of the long-run average cost (LRAC) curve. - **Profit Maximization:** Firms will adjust production to the point where marginal cost (MC) equals marginal revenue (MR), which, in a perfectly competitive market, is equal to the price (P).
Step 3: Conclusion.
Thus, in a perfectly competitive market, the price is determined by the intersection of supply and demand, with firms accepting this price as given and adjusting their output accordingly. Final Answer: \[ \boxed{\text{In a perfectly competitive market, price is determined by the intersection of supply and demand, and firms are price takers.}} \]