In order to analyse an enterprise’s profit maximisation issue, we must first particularize the market environment in which the enterprise purposes. In this chapter 4, students study and learn a market environment called ‘perfect competition’. A perfectly competitive marketplace has the following defining features :
- The market comprises of a large number of purchasers and sellers
- Each enterprise manufactures and sells a cognate product. i.e., the product of 1 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
- Information is accurate
The existence of a large number of purchasers and sellers means that each purchaser and seller is small compared to the size of the marketplace. This means that no individual purchaser or seller can impact the marketplace by their size. Cognate or Homogenous products further mean that the commodity of each enterprise is indistinguishable. So a purchaser can pick to purchase from any enterprise in the marketplace and he or she gets the same commodity. Free entry and exit basically means that it is easy for enterprises to enter the marketplace, as well as to leave it. This condition is necessary for the large numbers of enterprises to exist. If entry was tough or limited, then the number of enterprises in the marketplace could be small. Accurate information implicits that all purchasers and all sellers are completely knowledgeable about the cost price, quality and other relevant informations 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 necessitate? A price-taking enterprise accepts that if it sets a cost price above the market cost price, it will be unable and ineffectual to sell any amount of the commodity that it manufactures.
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