Question

What do you understand by the perfectly competitive market? What kind of demand curve does an individual firm face in perfect competition and how does it determine equilibrium level of output?

Answer 1

A perfectly competitive market is that where there will be many number of buyers and sellers and all the sellers sells identical commodities. It is a market condition where –

a. there will be many number of buyers and sellers

b. all the sellers sells identical goods

c. there will be free entry and exit for firms

d. there will be perfect information about the marker.

In a perfectly competitive market all the firms sells the goods at a price fixed by the industry. The firms are called as price takers. Firms have to sell all the units at the same price. Hence, the demand curve faced by a firm will be a straight horizontal line (perfectly elastic demand).

The demand curve will be same as average revenue and marginal revenue curves. When the firm sells all the units at the same price, AR=MR=Price=Demand curve

The firms cannot determine the price, since the price is determined by the industry. However, they can determine their output. The primary condition to determine the profit maximising output is MR = MC. The marginal revenue should be equal to the marginal cost. The marginal cost curve must intersect the marginal revenue while the marginal cost is in an increasing mode.