Discuss the relevance of perfect competition in the present context?

Discuss the relevance of perfect competition in the present context?

Ans: Perfect competition in that situation of the market wherein there are large number of buyers and sellers of a homogeneous product and the price of such product and the price of such product is determined by the market forces i.e. the industry. All the firms sell the product at this price.

According to left witch,

“ 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 market price”.

Features of perfect competition :

(1) Large number but small size of Buyers and Sellers:-

The number of buyers and sellers of a commodity is very large under perfect competitors, but each buyer and each seller is so small in comparison with the entire market of the product, that by changing the quantity of the product bought & sold by him, he cannot influence its price, it means, under perfect competition no firm can influence the market5 price by changing the quantity of its product.

(2) Homogeneous products:- The other assumption of homogeneous units of given product. The units sold by Ram & Co. are exactly similar to the units sold by Sham & Co. consequently buyers have no lea son to prefer the product of one seller to the one of another seller. Because of large number of seller and homogeneous products, a firm operating under the condition of perfect competition in mearly as price takes and not a price maker..

(3) Perfect knowledge:- Buyers and sellers are fully aware of the price of the product prevailing in the market. Buyers have perfect knowledge about the price being charged by the sellers for a given product. Sellers also known well, where and from which buyer, they can charge more price. Because of this knowledge and awareness, all sellers will change one price for one product from all will change one buyers without any distinction. There will therefore, be no uncertainty in the market.

4) Free entry and Exit of firms:- Under perfect competition, in the long run, any new firm can enter any industry and any old firm can withdraw from any industry . There is no legal or social restriction on the entry of new firms into any industry. This assumption is subsidiary to the first assumption regarding large number of sellers it is because of free entry of firms that their number is very large.

(5)Free from checks:- Buyers and sellers are free from any checks of restriction which regard to their buying and selling of any product. There is no agreement between buyers and sellers in respect of the production, quantity or price of a good. Nor have the buyers any attraction to buy the from a particular seller Government also imposes no restrictions in this matter.

(6) Perfect mobility:- Another important assumption of perfect competition is that in such a market there in perfect mobility of factors as well as goods & services. Factors of production are free to seek employment in any industry that they like. No factor of production is monopolized by anyone. Each firm can get as many factors as it needs. Goods and services can be sold at any place where they are libely to fetch good price .

(7) Lack of Selling Costs:- In a perfect competition a seller does not spend on advertisement and publicity etc. It is so because all firms sell homogeneous product. Hence, there is no need on the part of a firm to incur selling cost.

(8) Same price:- Under competitive market, each seller charges the same price for the same product. Price is determined by the industry. All firms have to sell their products at this price. Average revenue and marginal revenue of the product are equal, firms under perfect competition are price-takes and not price-maker. According to a case, In 1931, the Pepsi-Cola company was in bankruptcy for the second time in 12 Years. The president of Pepsi, Charles G.Guth, even tried to sell the company to Coca-Cola, but coke wanted no part of the deal. In order to reduce costs, Guth purchased a large supply of recycled 12- ounce beer bottles. A that time, both pepsi and coke were sold in six ounce bottles. Initially pepsi priced the bottles at 10 cents, twice the amount of the original six ounce bottles, but with little success. Then, however , with had the brilliant idea of selling the 12 ounce bottles of cokes. Sales took off, and by 1934, pepsi was out of bankruptcy and soon making a very nice profit.

After Marshall, a famous 19th century, economist, used a fish market as an example of perfect competition. For the sake of agreement, consider a fishmonger selling Cod. How would he price his product? First, he would looks around and find out at what price his numerous competitors were selling cod. He certainly could not price above the competitors, Since cod is pretty much identical and consumers should not care from whom they purchase . Further more, in fish markets, it is quite easy for customers to compare price. So, if he priced above his competitors, he would not sell any fish. Suppose he decided to price below his competitor. All of the customers would certainly purchase from him. However, if he were still making a profit at the lower price and would march the price cut in order to retain their customers. They may even consider lowering price more, if they could still make a profit and capture further customers.

This reasoning , along with the case of entry for new fish mongers, if there is a profit to be made, ensures that the price being charged is equal to the cost of supplying an additional fish, or the marginal cost. A fish monger will be a price-taker, setting his price identically to his competitors prices. A firm is a monopoly if it has exclusive control over the supply of a product or services. Therefore, a monopolist, in his pricing decisions, cannot consider the pricing decision of rival firms.

The smart monopolist consider the incremental effect of his decision, i.e what is the revenue to be received from selling one additional unit of a product and what are the costs of selling one additional unit of a product. Certainly if the costs of selling one additional units of a product. The low of demand says that he could raise the price of his product and thus sell less. Alternatively, if the revenues of selling an additional units of a product and thus sell less. The law of demand says that he could sell more by lowering his price.

Thus by setting the price correctly, the monopolist can sell the exact number of units such that the costs of selling one additional out exactly equals the revenue of selling the additional unity which by the above reasoning, is the only optimal price.