# Price and output determination-Perfect Competition

The Price and output determination-Perfect Competition is explained below.

Perfect competition: A perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models where conditions of perfect competition hold, it has been theoretically demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labour, equals the quantity demanded at the current price.

Characteristics of perfect competition:-

• Large numbers of sellers and buyers
• Homogeneous products
• Free entry and exit of firms
• Price taker
• AR and MR are constant
• No selling cost

Price determination- Market forces of demand-supply determine price of the product at market due to which firms under perfect competition are considered as a price taker.

Output determination- Output is determined on the basis of the following conditions.

1. MR=MC
2. MC must cut MR from below.

Profit situation of a firm:

1. If AR>AC, firms are in abnormal profit / supernormal profit.
2. If AR=AC, firms are in normal profit.
3. If AR<AC, firms are in loss/negative profit.

Equilibrium of a firm can be shown by the help of the following diagram:

a) Short-run equilibrium

In the diagram, the market determines P price for the product at the existing price.

Firm ‘A’ is in

TR= P × Q

= OP × OQ

= OQEP

TR= AC × Q

= OC × OQ

= OCMQ

profit= TR – TC

= PEMC

The firm is in supernormal profit.

Firm ‘B’ is in

TR = P × Q

= PEOQ

TC = AC × Q

= PEOQ

profit = TR – TC

=0

The firm is in normal profit.

Firm ‘C’ is in

TR= P× Q

= OPEQ

TC = AC × Q

= OCMQ

profit= TR-TC

= -CMEP

The firm is in the loss.

b) Long-run equilibrium

In long-run all abnormal profit and losses are converted into normal profit because there are large numbers of sellers and there are free entry and exit of a firm.

Therefore the Price and output determination- Perfect Competition is explained above.

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