What are the major characteristics of perfect competition? Determine price and output of a perfect competitive firm in short and long run.

Major Characteristics of Perfect Competition

•       Large number of Buyers and Sellers

•       No barriers to market Free entry or exit- Producers can enter market when profitable and exit when unprofitable

•       Homogeneous product – commodities are identical in size, shape, quality colour, design, packing etc.

•       No transportation Costs

•       Perfect Factor Mobility

•       Industry Supply and Demand set the equilibrium price in the market.

•       Absence of selling cost

•       No advertising cost or other sales promotion activities

•       Rationality

•       Perfect knowledge

•       Many participants – Firm is a Price taker not the price maker

Short Run Equilibrium conditition:

(i) Condition: Mr must be equal to MC 

The marginal cost must be equal to the marginal revenue. However, this condition is not sufficient, since it may be fulfilled and yet the firm may not be in equilibrium. Figure 4.4 shows that marginal cost is equal to marginal revenue at point e’, yet the firm is not in equilibrium as Oq output is greater than Oq’.

(ii) The second and necessary condition for equilibrium requires that the marginal cost curve cuts the marginal revenue curve from below i.e. the marginal cost curve be rising at the point of intersection with the marginal revenue curve.

There may be these two conditions in the short run:

Abnormal Profit Situation:

Loss Situation

The firm will continue in the business as long as it is in a position to cover its variable cost. If a firm is not in a position to cover its variable cost it will shut doun its operations. So the suct out point depends on the AVC and not on AC as shown in the diagram . OP is the point where it is able to revover its AVC. Below this price the firm will close its operations. So The OP is the shut down Point.

Long Run

 But in the long run the firm will be able to earn only normal profit.

Firms are free to enter into or leave the industry.

2. All firms are of equal efficiency.

3. All factors are homogeneous. They can be obtained at constant and uniform prices.

4. Cost curves of firms are uniform.

5. The plants of firm: are equal having given technology.

6. All firms have perfect knowledge about price and output.

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