In order to analyse an enterprise’s profit-maximisation issue, we must first understand the market environment in which the enterprise exists. In Chapter 4, students’ study and learn a market environment known as perfect competition. A perfectly competitive marketplace has the following defining features:
- The market comprises a large number of purchasers and sellers.
- Each enterprise manufactures and sells a cognate product, which means that the product of one enterprise cannot be differentiated from the product of any other enterprise.
- Entry into the marketplace as well as exit from the marketplace are free for enterprises.
The existence of a large number of purchasers and sellers means that each purchaser and seller is small as compared to the size of the marketplace. This means that no individual purchaser or seller can impact the marketplace by their size. Cognate or homogeneous products mean that the commodity of each enterprise is indistinguishable.
So, a purchaser can purchase from any enterprise in the marketplace and get the same commodity.
Free entry and exit basically mean that it is easy for enterprises to enter and exit the marketplace. This condition is necessary for the large number of enterprises to exist. If the entry is tough or limited, then the number of enterprises in the marketplace can be small.
It is important that all the purchasers and sellers are completely knowledgeable about the cost price, quality, and other relevant information about the commodity as well as the marketplace.
These features result in the single-most perceiving attribute of perfect competition: cost price-taking behaviour (trait). From the viewpoint of an enterprise, what does price-taking mean? If a price-taking enterprise sets a cost price above the market cost price, then it will be unable to sell any amount of the commodity that it manufactures.
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