Price and output determination under perfect competition
Published on: Mar 4, 2016
Transcripts - Price and output determination under perfect competition
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).
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.
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.
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).
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:
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
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
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
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.
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.
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
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
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.
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