MANAGERIALECONOMICS..

SUBMITTED TO- MAM KIRAN GUPTA

PRICE DETERMAINATION UNDER PERFECT COMPETITION…

MADE BY – AYUSHI (8370)KANIKA (8372)

“Perfect competition prevails when the demand for the output of each producer

Is perfectly elastic”

Price of commodity is determined by the industry.

Firm is a price taker,not a price maker.

PERFECT COMPETITION

Characteristics

LARGE NO. BUT SMALL SIZE OF BUYERS SELLERS

HOMOGENEOUS PRODUCTS

PERFECT KNOWLEDGE

FREE ENTRY AND EXIT OF FIRMS

FREE FROM CHECKS

PERFECT MOBILITY

LACK OF TRANSPORT COSTS

LACK OF SELLING COSTS

SAME PRICE

Large no. of buyers & sellers.Homogeneous products.Free entry and exit.Free from checks.Lack of selling cost.

Perfect knowledge. Perfect mobility.

PURE COMPETITIONPERFECT COMP.

Demand & Revenue under PERFECT COMPETITION

AR=MR

RE

VE

NU

E

OUTPUT

UNDER PERFECT COMPETITION,PRICE OR AVERAGE REVENUE OF PRODUCT IS EQUAL

TO MARGINAL REVENUE..

PRICE DETERMINATION UNDER PERFECT COMPETITION

PRICE PER UNIT

SUPPLY OF GOOD X

DEMAND FOR GOOD X

5 50 10

4 40 20

3 30 30

2 20 40

1 10 50

According to the table the equilibrium b/wDemand and supply will establish when the

Price rises to 3 rupees per dozen ..

QUANTITY

PRICE

EQ. PRICE

SHORTAGE

(a)INDUSTRY

SURPLUS

A B

D S

S D

E

AR=MR

REVENUE

QUANTITY

(b) FIRM

Price Taker And Not Price Maker

EFFECT OF CHANGE IN DEMAND& SUPPLY ON EQ. PRICE & EQ. QUANTITY

EFFECT OF CHANGE IN DEMAND ON PRICE

Supply remaining unchanged,

If demand increases price rises

And if demand decreases price

Falls…

In other words price varies with

Demand..

P1

P

P2

D1

D1

D

D

D2

D2 E1

E

E2

Q2 Q Q1

PRICE

QUANTITY

EFFECT OF CHANGE IN SUPPLY ON PRICE

D

D

E1

E

Q1 Q Q2QUANTITY

E2

S

S

S2

S1

PRICE

Demand remaining unchanged,

If supply increases price falls

And if supply decreases priceRises..

P1

p

P2

IMPORTANCE OF TIME ELEMENT INDETERMINATION OF PRICE UNDER

PERFECT COMPETITION

Time Element

LONG PERIOD

VERY LONG PERIOD

SHORT PERIOD

VERY SHORT PERIOD

MARKET PRICE

SUB NORMAL PRICE

NORMAL PRICE

TRADE CYCLES

VERY SHORT PERIOD-It refers to that time period in which supply of a commodity cannot be increased beyond its existing stock, if demand has increased. The firm does not have time to increase its stock.

SHORT PERIOD-

It refers to that time period in which supply of a commodity can be increased only upto existing production capacity, if demand has increased. There is not enough time for a firm to install new machines nor for the new firms to enter the industry

LONG PERIOD-It refers to that time period in which supply of a commodity can be increased or decreased according to the changed conditions of demand .The increased demand can be met by increasing the supply by installing new machines ,or new firms enter the industry.

VERY LONG PERIOD-It refers to that time period in which basic changes can be effected both in demand and supply . Demand is influenced by changes in the size of population ,its tastes and habits, etc. Supply is influenced by changes in techniques of production.

PRICE DETERMINATION IN VERY SHORT PERIOD OR DETERMINATION

OF MARKET PRICE

PERISHABLE GOODSGoods which perish very quickly are called perishable goods. For eg. Fresh vegetables and milk etc.

P1

P

P2 D1

D

D2

SO

E1

E

E2

PRICE

QUANTITY

DURABLE GOODS-

Some goods can be stored for a long time , e.g. wheat,soap,oil,etc

PRICE PER KG SUPPLY OF RICE

DEMAND FOR RICE

5 5 25

7 10 20

9 15 15

11 20 10

25 25 5

30 30 2

DURABLE GOODS-

P1

P

P2 D1

D

D2O

E1

E

E2

s

Q2 Q Q2

s

Market price of durable goods will be determined at a point where demand is equal to supplyAs shown in the diagram below-

DURABLE GOODS

THANK YOU

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