Question

Explain the role of prices in a perfectly competitive market? Discuss and explain structure of competitive market.

Answer 1

The role of prices in a perfectly competitive market are as a firm can sell any amount of the commodity at the adjusting price,it cannot influence the market price,accordingly a firm under perfect competition is a price taker not a price maker.

It also has following implications as:-

1.Market price is given to a firm,it cannot influence it.

2.firms demand curve or price level,is a horizontal straight line or perfectly elastic.

3.Elasticity for the firm is infinitive.

4.Firm is a price taker and not a price maker.

The structure of competitive market are-

1.Perfect Competition-It is the form of the market,where there are large number of buyers and sellers of a good.The prices are determined by the forces of supply and demand.Individual has no control over price.

2.Monopoly-A single seller of a product with no close substitute.for eg-Railways is the monopoly of the government.

3.Oligopoly-It is a form of market in which there are few big firms and large number of buyers,price and output decision of one firm effects the price and output decisions of the firms in the market.It is also called cut throat competition for eg-producers of cars.

4.Monopolistic Competition-It is a firm of a market in which there are many buyers and sellers of the good but the product of each seller is different from that of the other.for eg-producers of tooth paste-Colgate,close -up etc.

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