Explain the implications of the following features of perfect competition:
(a) large number of buyers and sellers
(b) freedom of entry and exit to firms
Explain the implications of the following features of perfect competition:
(a) large number of buyers and sellers
(b) freedom of entry and exit to firms
(a) The number of sellers is so large that the share of each is insignificant in the total supply. Hence, an individual seller cannot influence the market on its own, Similarly, a single consumer's share in the total purchase is so insignificant because of their large numbers that she cannot influence the market price on her own.
(b) The implication is that firms will earn the only a normal profit in the long run. In the short run, there can be abnormal profits or losses. If there are abnormal profits, new firms enter the market. The total market supply increases, resulting in a fall in market price and a fall in profits. This trend continues till profits are reduced to normal.
Similarly, if there are losses, firms start exiting. The total market supply decreases resulting in a rise in market price, and a reduction in losses. This trend continues till losses are wiped out.
(a) The number of sellers is so large that the share of each is insignificant in the total supply. Hence, an individual seller cannot influence the market on its own, Similarly, a single consumer's share in the total purchase is so insignificant because of their large numbers that she cannot influence the market price on her own.
(b) The implication is that firms will earn the only a normal profit in the long run. In the short run, there can be abnormal profits or losses. If there are abnormal profits, new firms enter the market. The total market supply increases, resulting in a fall in market price and a fall in profits. This trend continues till profits are reduced to normal.
Similarly, if there are losses, firms start exiting. The total market supply decreases resulting in a rise in market price, and a reduction in losses. This trend continues till losses are wiped out.
