Q.

“Firms in a perfectly competitive markets do not have the liberty to put their own prices or
charge higher” Why? Explain the complete phenomenon of a perfectly competitive market.
Give 3 suitable examples of perfectly competitive markets on line of products or services in
India or abroad. Also explain why you think they are in a perfectly competitive market.
Ans.

Perfectly competitive market - Perfectly competitive market is a market structure in which

there are large number of buyers and sellers producing homogeneous product so that no
individual firm can influence the price of the commodity.

“Firms in a perfectly competitive markets do not have the liberty to put their own prices or
charge higher” because there are a large number of buyers and sellers of the commodity under
perfect competition, each too small to exert any influence on the price of the commodity by
his/her actions. This means that under perfect competition, a firm produces such a small part of
the total market output that a change in its output will not have any noticeable effect on the
market supply and, hence, on the price of the commodity. A competitive firm has no market
power to influence the price. It means that a firm under perfect competition cannot influence
the market price by increasing or decreasing the quantity of output it produces. A firm is,
therefore, a price-taker rather than a price-maker.

The phenomenon of a perfectly competitive market explained below:

1. Homogeneous Product- All the firms under perfect competition produces homogeneous
or identical commodity. The product of one firm is perfect substitute of another firm’s
product. The product sold is identical in all respects like size, shape, quality, colour, etc.
2. Freedom of entry and exit- This means that new firms are free to entry the industry and
start producing if they so wish, and existing firms are free to cease production and leave
the industry if they so desire. Because of freedom of entry and exit the firms under
perfect competition always earn normal profit in long run.
3. Perfect knowledge- Consumers, firms and resource owners under perfect competition
have perfect knowledge about the market conditions. Each firm knows the price
prevailing in the market, and it would not sell the commodity at a price below the market
price. Similarly, each buyer has perfect knowledge about the prevailing price and the
characteristics of the product being sold and he/she is not prepared to pay a higher price
than the price prevailing in the market.
4. Very large number of Buyers and Sellers- Very large number of Buyers and Sellers is that
the number of sellers is so large that the share of each seller is insignificant in the total
supply. Hence, an individual seller cannot influence the market price. Similarly, a single
buyer share in total purchase is so insignificant because of their large numbers that an
individual buyer cannot influence the market price.
5. Perfect Knowledge among Buyers and Sellers- Perfect knowledge means that both
buyers and sellers are fully informed about the market price. Its implication is that no
 firm is in a position to charge a different price and no buyer will pay a higher price. As a
result, a uniform price prevails in the market.

3 suitable examples of perfectly competitive markets on line of products or services in India or

abroad are given below-

1. Agriculture:
In this market, products are very similar. Carrots, potatoes, and grain are all generic, with
many farmers producing them. As the product is homogenous, it is easy to buy some land and
farm it. Additionally, it is also easy to leave the market too. So the market has key signs of
perfect competition.
2. Foreign Exchange Markets:
In this market, traders exchange currencies. As there is only one US Dollar, one Great British
Pound, and one Euro, the product is homogenous. Additionally, there are many sellers and
buyers in the market. Furthermore, it is easy to buy some currency, and easy to sell it too.
With that said, there is an exception in the fact that traders may not have ‘perfect
information’. Normal buyers and sellers may be at a disadvantage compared to professional
traders who do it for a living. Even so, it is one of the closest examples of perfect competition
we can find today.
3. Online shopping:
We may not see the internet as a distinct market. However, the internet is home to many
buyers and many sellers. For instance, we only need to look at eBay as an example. In fact,
this is exactly what a market is although not on a physical level.
The internet allows customers to compare and gather ‘perfect information’ on a product.
Consider a specific book: there are many buyers and many distributors. In this case, it may
include Amazon, Waterstones, or Barnes & Noble. At the same time, there are generally little
differences in price.
So, there are many buyers and sellers selling similar products. Furthermore, entry and exit is
easy with low costs. Whilst companies such as Amazon have a strong market share, it is as
close to a real-life example as any.
 REFERENCES

BOOK NAME-
I. Managerial Economics – D N Dwivedi
II. Introductory Microeconomics – Sandeep Gard

SITES-
I. https://boycewire.com/perfect-competition-definition/