Perfect Competition

Under perfect competition market, there are large numbers of sellers selling a homogeneous product using identical production process. And all of them have perfect information about the market and price.

What is prefect competition?

Under perfect competition market, there are large numbers of sellers selling a homogeneous product using identical production process. And all of them have perfect information about the market and price.

Under this type of market , firm has no pricing policy of its own as the sellers are price takers. This means it has to accept the price determined by the market and sell as much as they are capable of selling at the prevailing market price.

Since each firm produces and sells a homogeneous product. It cannot increase its price beyond the market price. If it does not so then it has to lose all of its market demand to the competitors.

There is no control over market price which will equate the quantities available with the quantities which the buyers are willing to buy. The firm has to take a decision in favor of the quantity to sell.

Further, the firm can continue to produce so long as its marginal cost is less than or equal to its selling price up to the point at which the marginal cost is equal to price, increase in output will add to revenue and thereafter the increase will add to cost.

Example of perfect competition:

ABL LLP produces a product Y, the market for the product Z is competitive and the prevailing market price for a unit of product Y is ₹40. The following table presents the marginal cost and profit for the product Y:

Units	Total Revenue(₹)	Total Cost(₹)	Marginal Cost(₹)	Profit(₹)
0	0	20	–	(20)
1	40	30	10	10
2	80	50	20	30
3	120	85	35	35
4	160	125	40	35
5	200	170	45	30
6	240	217	47	23

The marginal cost for producing 4th unit is equal to the price per unit. Thus ABL LLP can maximize its profit at 4th unit level.