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Price and output determination under perfect competition

Published on: Mar 4, 2016

Transcripts - Price and output determination under perfect competition

• 1. PRICE AND OUTPUT DETERMINATION UNDER PERFECT COMPETITION. REPRESENTED BY PROF. S.D.BHARDWAJ REGISTER(B.M.I.E.T) FAZILPUR,SONEPAT ANDPROF. BHAWNA BHARDWAJ(ASSISTANT PROFESSOR OF G.V.M. GIRLS COLLEGE, SONEPAT).
• 2. PERFECT COMPETITION. IN PERFECT COMPETITION, INDUSTRY IS A PRICE-MAKER WHILE FIRMS ARE PRICE- TAKER. According to Prof.Bilas, “ The seller is price taker not a price maker.” Therefore in perfect competition price is determined by the industry, at which the demand for the output of each firm is perfectly elastic.
• 3. JAVSONS AND HIS SUPPORTERS VIEW According to them price is always equal to the marginal Utility of a commodity under perfect competition: Demand side: Px= Mux. If Px> Mux- Demand for the commodity will decrease as a result its price will fall and a M.Ux will increase till Px=Muxand vice-versa.(Supply is held constant.). But it is one-sided view as supply is ignored.
• 4. J.S.MILL AND DR.DAVID RICARDOS VIEWAccording to them price is always equal to the marginal cost of a commodity under perfect competition. Supply side: Px= MCxIf Px>MCx------ supply of X-commodity willincrease as a result Px will fall and its MC will increase till Px=MCx and vice- versa(Demand is held constant).
• 5. Dr. Alfred Marshall’s viewAccording to Dr.Alfred Marshall of a commodity is determined by the interaction of its demand and supply both. Both are needed to determine the price of a commodity as both the blades of a scissors are needed to cloth. The relative effect of demand and supply on the price determination will be as follows:
• 6. Effect of change in demand on pricewhile supply held constant. y D1 S D P1 Q1 Price P Q P2 Q2 S D1 D2 D 0 M M2 M3 M4 X Output
• 7. Effect of change in supply on price while demand held constant. y D S1 S S3 P1 PRICE P P3 S1 S D S3 0 M1 M M2 DEMAND AND SUPPLY. x
• 8. Price determination of Durable goods.( T.V., CARS,WATCHES, V.C.R etc.) Y D D1 D2 P2 P1 P S D D1 D3Reserve price0 M M1 X DEMAND AND SUPPLY
• 9. Factors which determine theR.P.(Reserve price). Cost of storage:- other things being equal, higher the cost of storage of a commodity lesser will be its R.P.(reserve price) and vice-versa. Liquidity preference: Greater the liquidity preference lesser will be the reserve price and vice-versa. Rate of interest: Rate of interest and reserve price are inversely related i.e.,at the higher rate of interest reserve price will be fixed high and vice- versa.
• 10.  Durability of the commodity:- if the commodity is less durable, less reserve price will be fixed for it and vice- versa. Laws of returns applicable in production: If law of diminishing returns is applicable,reserve price will be fixed high and vice-versa. Business trends: During inflation reserve price will be fixed high and during deflation it will be fixed low. Future expected price:- If these are expectations of rise in price in future, reserve price will be fixed high and vice-versa.
• 11. Short –run supply curve. Y SMC SAC AVC Q P2 SAR2=SMR2C,R,P S2 T2 S1 T1 P Q SAR= SMR P1 SAR1=SMR1 Q1 Shut- down point 0 M M M2 X Output
• 12. Short-run supply curve of an industry in perfect competition . SRS SMC SAC AVC (HIGHLY INELATIC CURVE) P2 Y p2 OM2 X 200 s1C,R,P s2 p OM X200 z1 P P1 price OM1 X200 z Q1 p1 z 0 M1 M M2 x 0 R1 R R2 X Output Output
• 13. Long-run supply curve of a firm Y LMC LAC supply curve Q P LAR= LMRC,R,P 0 M X LMC=LMR=LAR=MINIMUM LAC. LMC CUTS LMR FROM BELOW.
• 14. LAWS OF INCREASING RETURNS TO SCALE AND INDUSTRY’S SUPPLY CURVE. Y LMC LAC FIRM y Industry LAR=LMR OMX200 zP PC,R,P OM1X500 z1p1 P1 LAR1=LMR1 LRS0 M M1 X 0 R R1 X OUTPUT OUTPUT