A Presentation On Perfect Competition

In this presentation, we will explore the fascinating world of perfect

competition, delving into its definition, features, market structure,
key industries, advantages, and disadvantages. Let's dive in!

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 Definition of Perfect Competition
Perfect competition is a market in which there are many firms selling identical products
with no firm large enough relative to the entire market to be able to influence the market
price.
-By Leftwich
 Features of Perfect Competition

1 Large no of buyers 2 Homogenous product 3 Perfect knowledge

and sellers
Both buyer and seller of All the sellers sell Both the buyer and the
a commodity are large homogenous units of the seller are fully aware of
but each buyer and seller given product, In other the price of the product
is so small as compared words buyer has no prevailing in the market
to entire market of the reason to prefer the buyers are aware of price
product that both cant product of one seller to being charged by the
influence the price of the the another seller. seller and sellers are also
product. aware of price being
charged by other seller
 Cont..

1 Free entry and exit of 2 No govt. intervention 3 Price taker

firm
In perfect competition, There is no interference
A perfectly competitive
there are no barriers to from the government or
entry or exit. This firm is known as a price
any other regulatory
means that new firms taker because the
can enter the market body to hinder the
pressure of competing
and existing firms can smooth functioning.
leave at any time. Free firms forces them to
There are no controls or
entry and exit also accept the prevailing
ensures that there are restrictions over the
equilibrium price in the
neither abnormal supply or pricing and
profits nor losses by any market. Prices are
the price can change
firm in the long run. determined by the
solely based on the
market forces of
demand and supply
demand and supply.
conditions.
 Market Structure and Price Determination

Market Structure :

Perfect competition refers to a type of market where there are many buyers and seller that feature free barriers to entry, dealing
with homogeneous products with no differentiation, where the price is fixed by the market. Individual firms are price takers as the
price is set by the industry as a whole.

Price Determination :

Price in the market is determined by the entire industry i.e. by the total demand and total supply. The supply increases with the rise
in price and decreases with the fall in price. Hence, demand and supply are the two economic forces which operate in opposite
directions.
Examples of Industries with Perfect
Competition

Agricultural Products Floral Industry Stock Exchanges

Examples include fruit and In flower markets, various Stock markets feature numerous
vegetable markets, where vendors offer similar flowers, buyers and sellers engaged in
countless farmers bring their competing based on price and the trading of shares of publicly
harvest to sell. quality. owned companies.
Advantages and Disadvantages of
Perfect Competition
Advantages

Efficient allocation of resources, lower prices, increased consumer welfare, and dynamic
competition fostering innovation.

Disadvantages

Low profit margins, limited room for differentiation, and potential lack of investment in research
and development.
Conclusion and Key Takeaways

1 Perfect competition 2 Consumer benefits 3 Economic efficiency

creates a level
playing field Consumers benefit from Perfect competition
lower prices, increased promotes price and
It prevents monopolistic choice, and diverse allocative efficiency,
practices and ensures fair product availability. leading to optimal
competition among resource allocation.
firms.
Monopoly
Pure monopoly is that market situation in which there is
absolutely no substitute of the product, and the entire market
is under control of a single firm.

Monopoly exists when there is no close substitute to the

product and also when there is a single producer and seller of
the product.

E.g. Indian Railway is a monopoly, since there is no other agency in the

country that provides railway service.
 Features of Monopoly

No difference between
1 Single seller 2 Unique product 3 firm and industry

The entire market is A single seller sells a There is a single firm in

under control of a single product which has no the industry , If that firm
firm. substitute or at least, no exits the industry will
close substitute in the cease to exist
Independent decision market.
4 making
There is a single firm in the industry , If that firm exits
Firm is regarded as a 5 Restricted entry the industry will cease to exist
price maker.
Reasons for Monopoly
1 Restriction by Law

When the government restricts competition in the production and

distribution of a particular product.

2 Control Over Key Raw Materials

When the strategic raw material to produce a particular commodity is

scarce and is fully controlled by a single firm.

3 Economies of Scale

Large firms can achieve economies of scale, resulting in lower average costs and making it
difficult for smaller competitors to compete.

4 Small Market size

When the market is so small that there is no scope for more than one
player.
Examples of Monopoly Markets

Technology Indian Railway Pharmaceuticals

Companies like Microsoft and Energy companies that operate In some cases, pharmaceutical
Google have dominated the tech power plants and distribution companies with exclusive
industry, exerting significant networks often enjoy patents on life-saving drugs
control over software and monopolistic control over the enjoy a monopoly status,
internet services. supply of electricity or gas in a dictating prices and access to
particular region. essential medications.
Advantages and Disadvantages
Monopoly

Advantages

Monopoly allows for high profits and economies of scale.

Disadvantages

Lack of competition can lead to higher prices and reduced consumer choice.
Price Discrimination
Discrimination among buyers on the basis of the price charged for the same good (or service).

Objective is to maximise sales revenue

Bases of Price Discrimination

Personal- On basis of the paying capacity and/or the intensity of needs.

Geographical- People living in different areas are required to pay different prices for the same product.
E.g. edible oils and many packaged food items are sold at different prices in different States of India.

Time- The same person may be required to pay different prices for the same product.
E.g. off-season discounts.

Purpose of use- Customers are segregated on basis of their purpose of use.

E.g. electricity rates are lower for domestic purpose and higher for industrial purpose.
Degrees of Price Discrimination

Pigou has identified three degrees of price discrimination.

First Degree
charges a price exactly equal to the marginal utility of the consumer and leaves no consumer surplus.
Joan Robinson referred to it as perfect discrimination.

Second Degree
Divides consumers in groups on the basis of their paying capacities; a person with lower paying capacity is charged a
lower price and vice versa
Takes away the major (but not entire) portion of consumer surplus.

Third Degree
Segregates consumers such that each group of consumers is a separate market, and charges the price on basis of price
elasticity of different groups.
Takes away only a small portion of consumer surplus.
Price and Output Decisions in the Short
Run
1 Profit Maximization

In the short run, monopolies aim to maximize profits by setting output levels where marginal
revenue equals marginal cost.

2 Pricing Power

Having significant market power, monopolies can charge prices higher than their marginal
costs to increase profitability.

3 Restricted Output

Monopolies may limit production to create artificial scarcity, thereby driving up prices and
maximizing profits.
Price and Output Decisions in the Long
Run
1 Market Barriers

In the long run, new competitors may face entry barriers, such as high start-up costs or legal
regulations, which protect the monopoly's position.

2 Sustained Profits

Due to limited or no competition, monopolies can maintain high levels of profitability over an
extended period.

3 Economic Impact

Sustainable monopolistic profits can result in economic inequality.

 Economic Inefficiency of Monopoly

The real problem with monopoly is that

it produces too little output produces less
than the socially optimal level. This causes
too few resources to be allocated to the
production of the monopolized good or
service. We measure the amount of this
inefficiency in resource allocation by the
deadweight loss.