Price and
Output Determination Under Perfect Competition:
A market is a set of
conditions in which buyers and sellers meet each other for the
purpose of exchange of goods and services for money.
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The concept of perfect
competition was first introduced by Adam Smith in his
book "Wealth of Nations".
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A firm under perfect
competition faces an infinitely elastic demand curve or we
can say for an individual firm, the price of the commodity is
given in the market.
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By short run is meant a
length of time which is not enough to change the level of fixed
inputs or the number of firms in the industry but long enough to
change the level of output by changing variable inputs.
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In a competitive market, the supply
curve of a firm is derived from its marginal cost curve. Supply curve is
that portion of the marginal cost curve which lies above the
average variable cost curve.
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The short run supply curve of a
competitive firm is that part of the marginal cost curve which
lies above the average variable cost.
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All the firms in a competitive
industry achieve long run equilibrium when market price or marginal revenue equals marginal cost equals minimum of average total cost.
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While
explaining the short run supply curve for the firm,
we stated that the supply curve in the short run is that portion
of the marginal cost curve which lies above the average variable
cost curve, it is because of the fact that when the variable
casts of a firm are realized, the firm decides to produce the
goods.
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Dr. Alfred Marshall was the first
economist who pointed out that the pricing problem should be
studied from the view point of time.
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In a market, there are two sets of
forces tending in the opposite direction. On the one side, there
are large number of buyers who compete with one another for the
purchase of commodities at lower prices.
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In the short run, the size of a firm
and the number of firms comprising an industry remain the same.
The time is considered to be so short that if demand for product
increases, the old firm can use their existing equipments more
intensively but new firms cannot enter into the industry.
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When we speak of a long period, we
do not mean an interval of time in which we all may be dead. By
long run is meant the period in which the factors of production
can be adjusted to changes in demand.
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The main
points of distinction/difference between market price and normal price are as follows:
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We have
discussed the determination of price and output of a firm (Market
Price) producing a single commodity. We will be dealing now with
the pricing of interconnected commodities.
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When two
or more commodities come into existence as a result of a single process and with
the same expenses, they are said to be in joint supply.
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The railway freights are fixed on the principle of "What that
traffic wilt bear". By the phrase "what the traffic will bear"
is meant the fixation of railway rates according to the freight
bearing capacity of each service performed by the railway.
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"If a commodity can be put to several uses, it is said to have
composite or rival demand".
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