Revision: Introductory Microeconomics >> The Theory of the Firm Under Perfect Competition Economics Commerce (English Medium) Class 12 CBSE

According to Augustin Cournot, “Economists understand the term 'market', not any particular marketplace in which things are bought and sold, but the whole of any region in which buyers and sellers are in such close contact with one another that the prices of the same goods tend to equality easily and quickly.”

The term ‘market’ refers to the whole region in which buyers and sellers are in close contact to effect the purchase and sale of a product.

In economics, the term market refers to the mechanism or arrangement by which buyers and sellers of a commodity are able to interact with each other for having economic exchange and are able to strike a deal about the price and the quantity to be bought and sold.

“A market is the set of all actual and potential buyers of a product.”, Phillip Kotler

“Market includes both place and region in which buyers and sellers are in free competition with one another.”, Pyle

“A market means a body of persons who are in intimate business relations and carry on extensive transactions in any commodity.”, Jevons

“A market is a centre in which forces leading to exchanges of title to a particular product operate and towards which and from which the actual goods tend to travel.”, Clark and Clark

An oligopoly is a market structure in which a small number of large firms dominate the industry. These firms sell similar or differentiated products, and each firm’s decisions (such as pricing or output) directly affect the others, making them interdependent.

• According to Mrs Joan Robinson, "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."
• "Perfect competition is characterised by the presence of many firms. All of them sell identical products. The seller is the price taker." – Bilas
• "Perfect competition prevails when the demand for the output of each producer is perfectly elastic." – Mrs Joan Robinson
• "Perfect competition describes a market in which there is a complete absence of direct competition among economic groups." – Ferguson

"If a market is not organised, if contact between buyers and sellers is established with great difficulty and they are not in a position to compare the goods and the prices paid, then we face a situation of imperfect competition." — Fairchild

An oligopoly is a market structure in which there are only a few big sellers.

Perfect competition is a form of market in which there are a large number of buyers and sellers and a homogeneous product is sold at a uniform price.

When a firm is able to sell the same product or service to two different categories of consumers at different prices, then it is known as price discrimination. Generally, a Monopoly firm is able to practice price discrimination successfully.

The act of selling the same product at different prices to different buyers is known as price discrimination.

Monopsony refers to a situation in which there is a single buyer of a commodity and in which the entry into the market by other buyers is impossible.

Product differentiation refers to differentiating the products on the basis of brand, size, color, shape, etc.

According to Chamberlin, “A General class of product is differentiated if any sufficient basis exists for distinguishing the goods of one dealer from those of another. Such a basis may be real so long as it is of importance whatsoever to buyers and leads to a preference for any variety of the product over another”.

A monopoly is a market situation in which a single firm sells a commodity, and there is no close substitute for the commodity the monopolist sells.

Monopolistic competition is a market structure in which the number of firms is large, there is free entry and exit of firms, and the firms produce differentiated products.

• “Oligopoly is that situation in which a firm bases its market policy in part on the expected behaviour of a few close rivals.”
  — J. Stigler
• “An oligopoly is a market of only a few sellers, offering either homogeneous or differentiated products. There are so few sellers that they recognise their mutual dependence.” — P.C. Dooley

• "Elasticity of supply is defined as the percentage change in quantity supplied by percentage change in price." – Prof. Bilas
• "Elasticity of supply is the ratio of percentage change in 'quantity supplied over the percentage change in price." – Lipsey

\[e_s=\frac{\text{Proportionate Change in Quantity Supplied}}{\text{Proportionate Change in Price}}\]

Where:

• e_s: Elasticity of supply
• Δq: Change in quantity supplied
• ΔP: Change in price
• q: Original quantity supplied
• p: Original price

• In common language, a market is a place where buying and selling occur.
• In economics, a market is any arrangement that allows buyers and sellers to meet (physically or virtually), decide a price, and exchange a commodity or service.​
• A market can be local, national, or international.
• Essential elements of a market: commodity, buyers and sellers, area of operation, communication/contact, and price.​
• There are two main ways to define a market: geographical (place‑based) and functional (activity‑based).​
• Competition among buyers and sellers tends to produce one prevailing price for the same commodity at the same time within a market.​

• Price effect depends on the size and direction of shifts in both demand and supply.
• Quantity usually moves in the direction of both curves (↑ if both rise, ↓ if both fall).
• Use diagrams to show shifts.
• Always check which change (demand or supply) is bigger to predict the final outcome.

• Perfect competition is an ideal market where many buyers and sellers trade identical products, and no one can control price.
• Firms and buyers are price takers; the price is fixed by industry demand and supply.
• Pure competition needs 3 conditions (large numbers, homogeneous product, free entry/exit).
• Perfect competition needs 7 conditions (3 basic + perfect knowledge, factor mobility, no selling costs, no transport costs).
• The model is used as a benchmark to judge how efficient other markets are.

• Imperfect competition is more common in the real world than perfect competition.
• It occurs when at least one condition of perfect competition fails (e.g., product differentiation, entry barriers, imperfect information).
• It includes monopoly, monopolistic competition, oligopoly, and duopoly as major forms.
• Firms often have some power to set prices, unlike in perfect competition, where firms are price takers.​

• Oligopoly: A market with a few dominant firms, high interdependence, and barriers to entry.
• Firms compete both by price and by non‑price methods (advertising, quality, branding).
• Price rigidity and non‑price competition are typical features of oligopolistic markets.

• Price ceiling helps buyers (causes shortage).
• Price floor helps sellers (causes surplus).
• Both disrupt market equilibrium.
• Rationing and black markets often follow government controls.

• Firms are assumed to mainly aim at profit maximisation.
• Economic profit = TR − TC.
• Normal profit is the minimum reward needed to keep a firm in the industry and is part of the cost.
• Pure (economic/supernormal) profit is the extra over and above all costs, including normal profit.
• Under the TR–TC approach, profit is maximum where the TR–TC gap is the largest.

• Shows total quantity supplied by all producers at different prices.
• Market supply = sum of individual supplies (A + B + C).
• Higher price → higher market supply.
• Market supply curve slopes upward, showing direct relationship.