PRICE DETERMINATION UNDER PERFECT COMPETITION

 Though perfect competition is rare,almost a non-existant situation, yet we study price determination under the situation. A perfectly competitive market is one in which the number of buyers and sellers is very large, All engaged in buying and selling a homogeneous product without any artificial restriction and possessing perfect knowledge of a market at a time.

There are two parties which bargain in such a market, the buyers and the sellers. It is only when they agree,  a commodity can be bought and sold at a certain price. Thus product pricing is influenced both by buyers and sellers, that is by demand and supply.

The demand and supply are the two forces, which move in the opposite directions. Price is determined at a point where these two forces are equal, that is known as equilibrium price.
The firm may earn normal profits, super normal profits in the short run whereas it earns normal profits in the long run. In a perfectly competitive market, market demand and market supply determine the equilibrium price.

Price of a commodity is determined by the demand and supply. Both the demand and the supply vary with price.

MARKET PRICE VS NORMAL PRICE :

The price prevailing in the long run is called normal price.The price determined in the very short period is called Market Price.As supply remains constant, in this period, demand plays an important role in the determination of price.In the long run supply can be adjusted fully to changes in demand. In this period supply plays an important role.

PRICE DETERMINATION IN SHORT PERIOD:

First of all we divide product into perishable and durable according to the nature of product. After this, we create demand and supply curves on the graph paper. In short period, price will be affected from demand because we can not increase our supply according to demand.

PRICE DETERMINATION IN LONG PERIOD :

In long period, only normal price will be fixed at the point where total quantity of demand will be equal to the total quantity of supply. Company or firm will receive only normal profit at this equilibrium.