Price Competition, Perfect Competition, and Price Determination under different time periods:
26/June/2025 00:42
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? What Do You Mean by Price Competition?
Price competition occurs when firms try to attract customers by lowering prices of their products rather than using other means like advertising or product differentiation.
> It is most common in perfectly competitive and oligopolistic markets, where products are similar and customers are sensitive to price changes.
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? Conditions and Characteristics of Perfect Competition
A perfect competition market structure is an idealized form of a market where no single buyer or seller has any control over the price.
✅ Key Conditions:
Feature Description
Large number of buyers & sellers No single participant can influence the market price
Homogeneous products All firms sell identical products
Free entry and exit Firms can freely enter or leave the market
Perfect knowledge Buyers and sellers have complete info on prices
No transport cost Prices are uniform across the market
Price takers Firms accept the market price as given
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? Price Determination in Perfect Competition
In perfect competition, the market price is determined by demand and supply, and each firm accepts this price.
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? 1. Short-Period Price Determination
In the short run:
Some inputs are fixed (e.g., plant size).
Firms can make supernormal profits, normal profits, or even losses.
Price is determined at the point where Market Demand = Market Supply.
Firms cannot adjust all resources, so they may not operate at full efficiency.
New firms cannot enter or exit immediately.
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? 2. Long-Period Price Determination
In the long run:
All factors of production are variable.
Firms enter or exit freely.
Supernormal profits attract new firms, and losses drive firms out.
Eventually, firms earn normal profit only.
Outcome:
Firms operate at the minimum point of Average Cost (AC).
Price = Average Cost = Marginal Cost = Marginal Revenue
This leads to optimum allocation of resources, and productive and allocative efficiency.
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✅ Conclusion
Under perfect competition, price is governed by the forces of supply and demand, and individual firms are merely price takers. While price competition is intense, in the long run, equilibrium ensures only normal profits and full efficiency.
