Question

The classical linear regression model in econometrics is the equivalent of the model of perfect competition in price theory- Explain

Answer 1

Answered:-
Linear regression is described in every statistics book, and is performed by every statistics program. The purpose of linear regression is to find the line that comes closest to your data. More precisely, the linear regression program finds values for the slope and intercept that define the line that minimizes the sum of the square of the vertical distances between the points and the line.

Perfect Price competition model suggest a kind of market that is perfect competition market. This market is known as perfect competition because of perfect knowledge of everything by buyers and sellers. Because of assymetric information no seller can charge differently from others.

The main assumptions are as follows:

Large numbers of buyers and sellers
Free entry and exit of firms
Homogenous product: All seller provide same and similar product with no differentiation
Firms are price taker: AS no product differentiation exists, no single firm can decidie its own price. Price is set by industry through market forces and firms tak those prices.
NO advertisement cost
Consumers bargaining power is high than producers' bargaining power.
ONly normal profit occurs in long run.
The working of this model is as follows:

In short run, firms can earn super normal profit and even losses as well.

The equilibrium occurs at the intersection of demand and supply.

Price equals Marginal Revenue, and firm places output where Marginal revenue equals its MC that is where price = MC.

IN long run, when outsiders see super normal profit they enter into the market. With increased number of sellers, output get dispersed among sellers reducing each firm's output and profit. Sometimes this profit reduces to the occurence of loss to firms by few firms. These loss earning firms exit the market and the remaing firms earn only normal profit in long run.

Yes this model is logic and few markets of such kind exists in market. These markets are generally markets of providing basic goods like salt, sugar basically agriculture market.