RBSE Class 12 Economics Notes Chapter 11 Perfect Competition Market

Rajasthan Board RBSE Class 12 Economics Notes Chapter 11 Perfect Competition Market

A basic assumption of the theory of the firms is that firms try to maximize their money profits. It is economic profits, that is, the difference between total revenue and total costs (both explicit and implicit) which is maximized by a firm. A firm achieves its equilibrium regarding price and output when it is maximizing its economic profits.

A market is said to be perfectly competitive when demand and supply forces operate freely to determine the market price. This market price is uniform for the whole market. There is no restriction on entry, no product differentiation and no market concentration.

In a perfectly competitive market, there are a large number of buyers and sellers and their individual demand and supply is a small fraction part of the total market demand and supply of the product.

All sellers sell homogeneous units of a given product and buyers will have no reason to prefer the product of one seller to the product of another seller in perfect competition market.

Buyers and sellers are fully aware of the price prevailing in the market. Buyers know it fully well at what price sellers are selling a given product.

In a perfect competition market, factors of production are completely mobile. Buyers have no preference between different sellers and also between different units of commodity offered for sale; also sellers are quite indifferent as to whom they sell.

A firm can enter and leave any industry. There is no legal restriction on the entry or exit.

The market will decide the price on the equilibrium point where market demand is equal to market supply and each firm will accept the price decided by the market. So we can say that market is price maker and firm is price taker.

For one price to prevail throughout the market, it is essential that there is no extra transport cost for the consumers while buying a commodity from different sellers.

Price is fixed by the forces of market demand and market supply. It is at the price thus determined that all the firms in the industry sell their output.

Demand curve of this market is perfectly elastic. It means that the firm can sell any amount of the commodity at the prevailing price.
Shape of firm’s demand curve under perfect competition market is a horizontal straight line parallel to the X axis. It signifies elasticity of demand (Ed) = ∞

When the buyers and sellers of product are spread to a village, suburb or township, then the market is called local market. Example Markets for perishable goods -butter, eggs, milk, vegetables, etc.

RBSE Class 12 Economics Notes Chapter 11 Perfect Competition Market Notes

When the market of any product is limited to a region only, then it is called regional market. Example:- Semi-durable goods – Shirts.
When the product’s buyers and sellers are spread all over the country, then the market of that product is called the national market. Examples :- Durable goods and industrial goods.

When the buyers and sellers of the product spread in different countries of the world, the market of that product is called the international market.

When the sale and purchase of various products is done in a market, that market is called the general market. E. g. sale of clothes, books, jewellery, grocery, etc.

When, in any market, the sale and purchase of a specific product is done, then that market is called special market., i.e. bullion market, fruit market, grain market, cloth market, etc. In sample selling, commodities are bought-sold by exhibiting samples.

Differentiation in products is done by branding, i.e. Hallmark jewellery, ISI mark electric products, Agmark Ghee, etc.

The retail market is the market in which the product is sold to the consumer in small quantities.

The wholesale market is the market in which the product is sold to the consumer in bulk or in wholesale. Most of these products are bought by retailers.

Very Short-term market : In this market, due to limited time period, the sale of the product does not increase or decrease. It means supply is completely fixed. Only demand may change. Example: Perishable products – milk, curd, butter, fruits, vegetables, eggs, etc.

Short-term market: The time period in this market is so short that supply can be increased or decreased by changing the variable factors only.

Long-term market: When the period of time becomes so long that it is possible to adjust the production according to demand, then it is a long-term situation. Since the time duration is quite long, we can change all the variable factors. Changing the fixed and variable factors can help adjust the supply demand.

Very Long-term Market: Here,the time period is so long that both demand and supply change for an extended period.

RBSE Class 12 Economics Notes Chapter 11 Perfect Competition Market Notes
Important Glossary

  1. Perishable : Things, especially food grains, which decay quickly.
  2. Commodity: A raw material or primary agricultural product that can be bought and sold, such as copper or coffee.
  3. Market: Market implies that entire area, in which, buyers and sellers are spread out in a competitive market.
  4. Local: Related or specific to a certain area or neighbourhood.
  5. National: Related to a nation; common to or specialty of an entire nation.
  6. Regional: Relates to, or characterized by a region.
  7. International: Existing, occurring, between two or more countries.
  8. Retail : Sale of goods to the public in relatively small amounts for use or consumption rather than resale.
  9. Retailer : A person who sells products in retail.
  10. Wholesale : Being sold in large quantities, which can be re-sold by others (retailers).
  11. Wholesaler : A person who sells products in wholesale.
  12. Buyer: A person who makes a purchase.
  13. Seller : A person who sells something.
  14. Profit: A financial gain.
  15. Equilibrium : A state in which opposing forces or influences are balanced.
  16. Demand : Demand is the need of the consumer or the owner of the product or the desire to experience the service.
  17. Supply: Supply is the amount of something, that firms, consumers, labourers, providers of financial assets, or other financial agents are ready to make available in the market.
  18. Perfect Competition : When demand and supply forces operate freely to determine the market price.. This market price is uniform for the whole market. There is no restriction on entry, no product differentiation and no market concentration.
  19. Very Short Period : This is such a short period that the supply of product is completely stable. No decrease/increase in it is possible.
  20. Short Period : That period of time where only the variable factors can be changed to change supply of product.
  21. Long Period : That time period when producer is able to change the supply of product according to demand. All factors are variable in this period.
  22. Very Long Period: That time period in which new techniques of production are used and new industrial units can be established. It is possible to make basic changes in factors of production in this period, and both supply as well as demand can be changed.

RBSE Class 12 Economics Notes