Perfect competition

What is a Competitive Market
The degree to which a market or industry can be described as competitive depends in part on how many suppliers are seeking the demand of consumers and the ease with which new businesses can enter and exit a particular market in the long run.

The spectrum of competition ranges from highly competitive markets where there are many sellers, each of whom has little or no control over the market price - to a situation of pure monopoly where a market or an industry is dominated by one single supplier who enjoys considerable discretion in setting prices, unless subject to some form of direct regulation by the government.

In many sectors of the economy markets are best described by the term oligopoly - where a few producers dominate the majority of the market and the industry is highly concentrated. In a duopoly two firms dominate the market although there may be many smaller players in the industry.


Features of Perfect competition

1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices
charged by each firm.
5. The industry is characterized by freedom of entry and exit.

Profit Maximisation

Profit is the difference between Total revenue and total cost. In order to Find the firm’s profit we must know the firm’s cost and revenue.
Π(q) = R(q) – C(Q)
Revenue = profit – total cost of production
Total cost of production is the sum of fixed cost and variable cost.
Revenue = Price of the product x number of units sold.
In order to maximize its profit, firms will choose the amount of output that minimizes the cost. With minimum cost and the same revenue , profit gets maximized.




We can derive the profit maximizing condition from equation 1,
Profit is maximized at a point where the slope of profit curve becomes zero. i.e. ∆ Π/∆q = 0
Or ∆Π /∆q = ∆R/∆q – ∆C /∆q = 0
Where ∆R /∆q = MR and ∆C /∆q = MC
Or MR – MC = 0
Or MR = MC