 So, we will continue our discussion on market structure. So, if you remember in the last class, we were talking about the different kind of market structure and how the classification is being done in order to understand the different kind of market. One is the substitution the ease of entry and second is again the what is the nature of competition. So, there are three parameters on that basis generally the markets are divided into different form and from that if we remember the classification, we start with perfect competition. Then you come to monopoly. So, perfect competition and monopoly to extreme form of market structure and in between this monopolistic and oligopoly market structure comes. So, we will start our discussion with the detail on particular market structure and today we will talk about the market that is talks about the perfect competition. Its name suggests this is perfect competition, but we will check that whether it really there is a perfect competition or there is any kind of competition between this firm in this typical type of the market structure. So, today our focus of our session will be on features of perfect competition, what are the characteristics or features of perfect competition. Then we will see how the demand and revenue of a firm under perfect competitive market structure. Then we will talk about the short term equilibrium, the price output determination, whether in the short term the firm is getting loss, the firm is incurring profit or the firm is just getting the normal profit. Then we will talk about the market supply and specific firm supply analysis keeping the cost function or the cost analysis in the background. So, to start with perfect competition if you look at this is the most basic form of the market structure. It is theoretical and hypothetical, but this is the most ideal form of the market. So, may be this is the very basic form of market structure, it sounds theoretical, it looks hypothetical, but this is the most ideal form of the market. And why it is ideal may be when we look at the characteristic when we look at the feature, it should support the supplier and both to the buyers and the consumer and that is why it called as the ideal form of the market, but when it comes to the implementation and applicability of the such type of market structure there is a difficulty and that is why if you look at there is no much relevance, like close relevance of this perfect competitive market structure in the real life except in few cases. The term perfect competition refers to the set of condition prevailing in the market. So, perfect competition market structure on the set of condition that prevails in the market and this that basically how the buyers and how the sellers behave in the market. So, as the name suggests and as we discussed also before couple of minute that perfect competition if you look at the name suggest that it is a perfectly competitive market and all the all the firms they compete with each other, but contrary to that there is a there is a fact that in case of perfect competitive market structure there is complete absence of rivalry among the individual firms. So, it is not perfect competition it is about rather the absence of the rivalry or absence of the competition among the individual firm. So, in economic theory it has a meaning that is diametrically opposite to the everyday use of this term. So, when you talk about perfect competition in really if you look at in reality this there should be the competition should be perfect, but if you look at there is complete absence of competition in the market. So, when it takes this case into the economic theory the meaning of the perfect competition is a diametrically opposite to the everyday use in this everyday use of this term. So, in practice businessmen use the word competition as the synonym is for the rivalry. So, competition and rivalry use as a synonym in practice and businessmen generally use this word, but when it comes to the theory of market when you have talked about the theory of the market structure perfect competition implies no rivalry among the firm. There is complete absence of competition among the firms and there is no rivalry no competition in this kind of the market structure. So, the name if you look at that call tells perfect competition, but in the reality the characteristic of the perfect competitive market says that there is absence of there is absence of competition, there is no competition at all in this form of the market. Now we will talk about the characteristic of a perfect competitive market what are the characteristic of a perfect competitive market. The first on the foremost characteristic of a perfect competitive market is there are large number of buyers and sellers in the market. There are many firms who are producing the product in the market, there are many sellers, many consumers to buy the product. So, there are large number of buyers for the product and there is also large number of sellers of the product. So, in the background there are also large number of producer of the product because that leads to the again to the large number of sellers of the product. So, either you call it large number of consumer or producer, you can call it large number are buyers and sellers in the market. The second characteristic of perfect competition says that it is a homogeneous product. It is homogeneous, the meaning of homogeneous is that uniform product, all the firm they produce uniform products, uniform products in case of a perfect competitive market. So, the products are not different from each other on the basis of the price, on the basis of the quality or on the basis of the may be any type of product differentiation. So, homogeneous product is it should be uniform product, but when you take this to the real world application, whether number of firms they can produce the same kind of product or may be the homogeneous product, may be the answer is somehow close to know because the technology used by the firm is different, may be sometimes the raw material used by the firm is different. The skilled people involved in producing the product they are also different, may be the skill is same, but the individual is different. So, some amount of the difference is there between the one firms product to the other firm products, but as a whole it is a similar kind of product or it is a uniform kind of product and rather than uniform or homogeneous we can call it that the similar product that is produced by all the firms in the market. But as theory say this is one of the characteristic of the perfect competitive market firm that it is a homogeneous product. Then the third characteristic talks about perfect mobility of factor of production, it means there is no restriction on the factor of production. Suppose you take the case of labor, the labor they may the laborer may be one working in one firm they can move to the other firm, they can move to the third firm and if possible they can again come back to the previous firm. So, there is perfect mobility of factor of production and mainly here we talk about the labor input and they move from one firm to another firm to do the same kind of job or may be different kind of job, but the end result is again same all the firms they are producing homogeneous product or all the firms they are producing the uniform or so called the similar product. Then the fourth characteristic is there is free entry and free exit in the market. All the firms there is no entry fee if you look at there is no entry fee there is no restriction in entering to the market. Anyone has the capability to produce and sell they will be there in the market from the supply side. Anybody who has the capability to buy they will be there in the market as the buyers. So, from the demand side if someone has the capability to buy the product they generally they are in the market there is free entry from them and similarly from the supply side also any producer or seller if they are ready to supply or they can ready to sell or they are ready to produce they should be there in the market because they have the capability to sell in the market. This is about the free entry. Similarly, when it comes to free exit there is no if you look at this it is not any trapping or anything that stops the seller or the buyer to leave the market. If the sellers they feel that they are not getting profit in the market or then or they are operating in the market they are selling their product in the market and if they are not getting profit out of it they will prefer to get the market and there is no restriction in exiting the market. Similarly, for the buyer till the time they feel that the product is worth for them and they are getting it in a good market price generally they operate in the market or they sell from the they generally buy it from the market. But once they feel that the product is not worth buying or they do not require that product anymore they can always they can always come out of the market or they can always exit out of this market. So, if you look at there is no restriction in entering the market or there is no restriction also from the also from coming out of this market. The fifth characteristic is perfect knowledge and what is this perfect knowledge we can reframe this as that that all the buyers and sellers they have perfect information about them or they have full information about the product about the price and about the sellers from whom they are buying the product. Similarly, from the sellers from the seller point of view also they have full information about the price and they have full information about the product. So, the one of the maybe important characteristic of perfect competitive market is that the buyers and sellers they have the full information about the price of the product about the product and in general what is the market condition or what is the market how the market is doing or as a whole how the what is the seller perspective or what is the buyers perspective both the seller and buyers they have information about them. Then there is absence of collusion and artificial restriction means if you look at since all the firms they are producing the same product and there is absence of competition somehow it may lead to the fact that they will collude and they will charge a higher price which is which is not again a good sign for the market to grow because that way they will try to take charge a higher price and the buyer will be at the other end and if all the firms they are producing the same product they the collusion power is also more strong over here. So, there is still in case of characteristic market even if all the firms they are producing the product one of the characteristic of the perfect competitive market is that they will not get into the collusion or there is no form of any artificial restraint or maybe there is no form of restraint no form of control from the authority or any kind of organization in the market that is always the market forces the supply forces and demand forces they decides the they decides the course of action regarding the price regarding the product. The last characteristic which talks about the how the market functions whether there is a intervention from the government whether the authority gets into this or maybe whether who is the who controls the demand forces and who controls the supply forces. The fact is that in case of perfect competitive market structure there is no government intervention at all it is the demand forces it is the supply forces they decides the price they decides the quantity. So, if you remember in one of our discussion when we are talking about the equilibrium that supply and demand forces if the when the demand is equal to supply generally that is the case where we get the equilibrium and whenever there is a mismatch between the supply and demand generally the buyers and the seller they among themselves they again comes back to a situation which is again equilibrium and how they comes back to a situation when again equilibrium either they control the demand forces or they control the supply forces. So, in generally there is no intervention from government rather the buyers and seller among themselves they decides the price they decides the output or maybe the supply forces rather than saying buyers and seller the supply forces and demand forces they decides what should be the price what should be the output and there is no form of intervention it is like the invisible hand principle as we talk about in case of a different kind of economy. So, in case of perfect competitive market structure it is a invisible hand principle that the market forces decides everything what should be the price what should be the product and what should be the market condition. So, if you look at when you analyze or when you look at all the characteristic perfect competition is an uncommon phenomenon in real business world. However, the actual market that approximate to the condition of perfect competitive model include to share market, securities and bond markets, local vegetable markets and agricultural product market to name few. So, it looks very uncommon when you talk about the characteristic that there is free entry free exit or homogeneous product, but somehow if you down the line if you can take out some of the restriction if you can generalize some a bit if you look then in that case the actual market some of the actual market that their feature or their characteristic close there is a resemblance with the perfect competitive market structure. So, in this case if you look the local vegetable market or the agricultural product market their product is not different from one another not much different. Suppose it is rice or a typical vegetable they just produce that vegetable maybe someone is of a good quality, someone is of a bad quality, someone is small, someone is large, but in general it is a similar kind of product. So, we will talk more about the application of the perfect competition the real one in the later part of the session where we will see that whether any typical market fits to within the proper competitive market, but in general these are the markets like agricultural product market, local vegetable markets, share market, bond and security market they are somehow close to the they have some feature which is similarity with the perfect competitive market structure. And if you look at even if it is uncommon still some form of market still they adopt it and they call it is a proper competitive form of a market. So, as we know this is an uncommon phenomena looks like from the characteristic as a whole this market form is an uncommon phenomenon, but as a whole when you talk about a perfect competitive model that has been a popular model used in economic theory due to analytical value as it provides the starting point and analytical framework for the pricing theory. So, if you look at maybe from the characteristic point of view it is like very uncommon, but when it comes about the model that gets used in the popular competitive market structure that is most popular model and sometimes this serve as a base to the many of the other models and it is due to its analytical value as it provides the starting point and analytical framework for the pricing theory. So, then we will talk about that how what is the demand and what is the revenue of a competitive firm or as a industry as a whole or what should be the value of total revenue, how total revenue is calculated, what is the demand that will check for the typically competitive firm. So, we will take the revenue part first and total revenue for a firm is selling price times the quantity of goods sold. So, total revenue is price multiplied by the quantity, if price is 10 rupees and quantity sold that is 100 units total revenue will be 1000 units because P is 10 and Q is 100. So, total revenue is in the very simple merits nothing but the nothing but the nothing but the total revenue or the total output what they total revenue they get by selling the quantity that is produced by them or that is getting sold by them. Average revenue tell us how much revenue or firm receive for the typical unit sold. So, basically this is the average revenue that is revenue per unit of the output and average revenue is the total revenue divided by the quantity sold that is total revenue divided by Q. Then the revenue of the competitive firm in perfect competition average revenue is equal to the price of the goods that is PQ by Q which comes to P and marginal revenue is the change in the total revenue from an additional unit sold and for a competitive firm the marginal revenue equals the price of the goods. So, if you look at in case of perfect competitive market structure the price is equal to the average revenue which is also equal to the marginal revenue. There is no difference between the average revenue, marginal revenue and price that we will check later again when we will take a numerical firm, but for the timing the understanding is in case of perfect competitive market structure the price is equal to average revenue which is equal to the marginal revenue. So, this is the typical example that how we get the total revenue average revenue and marginal revenue Q is the quantity the number of unit sold P is the price and total revenue is nothing but the price multiplied by quantity average revenue is that is total revenue divided by Q because this is the per unit revenue and marginal revenue is the change in the total revenue with respect to change in the Q. So, if you take that why this P is equal to average P is equal to average revenue which is equal to marginal revenue. Suppose total revenue is equal to PQ then average revenue is total revenue by Q. So, this is PQ by Q and this comes as P and similarly marginal revenue is DTR that is by DQ then this is D PQ with respect to Q and again if you simplify this then this is DQ DQ which is equal to P. So, price is equal to the average revenue which is equal to the marginal revenue in case of the preferred competitive market structure. So, in order to determine just how much each firm wants to sell or how much each firm is willing to offer at prevailing market price we can analyze using the concept of cost. So, how much the firm is willing to sell or how much the each firm want to sell that can be decided on the basis of the cost function or that can be decided on the basis of the prevailing price. So, we will analyze that by using the concept of the cost. Then the market demand curve for the whole industry and if you remember in the previous class like when we are talking about that how much they want to sell or how much that depends always depends on the profit of the whatever the profit they are getting. So, what is the profit over here? The profit is the difference between the total revenue and total cost. So, if you remember the point at which the profit is maximum that is the point the firm generally wants to operate because they want to sell that much amount of output where they get the maximum profit. Then we will talk about the demand for the competitive rise taker that is for the individual firm and for the market demand as a whole. So, the market demand curve if you look at the market demand curve this is the sum total of the demand from the all the firms and it is generally a standard downward sloping demand curve because we know that the demand curve is downward sloping. So, market demand curve is always downward sloping this is the summation of the individual demand curve from the all the firms. The downward sloping curve gives a the price and quantity combination that is available to buyers such that the individual buyers able to get the maximum amount of output at the existing price. And the demand curve of the individual firm is horizontal straight line showing that the firm can sell infinite volume of output at the same price. So, in case of a competitive price taker the demand curve for the firm is the demand curve for the firm is straight line that is horizontal and parallel to the x axis that is horizontal axis. And what is the significance of that the significance for that is that whatever amount the firm wants to sell they can sell at the same price. There is no restriction on the amount what they are going to sell because price has to be constant at that point any firms any amount they would like to sell they can sell it that typical market as a typical market and typical price. Now, what is market supply market supply is upward sloping giving various combination of price and output shows the maximum output any firm is willing to produce and supply at each specified price. Market supply curve is the horizontal summation of the individual supply curve. So, this is the demand for the competitive price taking firm in the market panel talks about the market industry as a whole panel to talks about the demand curve facing the price taker. So, supply is upward sloping demand is downward sloping the point at which demand and supply intersect each other that is the equilibrium point and corresponding to that we get the equilibrium quantity that is q 0 and equilibrium price is p 0. Panel B is the demand curve facing generally facing a price taker or for an individual firm and as we know that the price is equal to marginal revenue and also average revenue here. The demand curve is just a straight line the price comes from because individual firm not in a position to influence the price that is the reason the generally all the firms they are the price taker firm because not a single buyer or not a single seller they generally influence the price. So, whatever the price set by the market that is generally accepted by all the firms. So, none of the seller they fix up their price rather they accept whatever the price fixed by the market supply and market demand and they accept that as the market price. So, here we get from the market supply and market demand curve we got the price and if you look at the demand curve for the and at that price the firm can sell any amount. So, that is the reason the price is fixed and the quantity is changing the quantity is just moving from one point to another point and the here that is d is equal to m r.