Determination of price and output of the industry and the firm under perfect competition.
Answers
Answer:
Determination of price and output of the industry and the firm under perfect competition.
Explanation:
Under perfect competition, the buyers and sellers cannot influence the market price by increasing or decreasing their purchases or output, respectively. The market price of products in perfect competition is determined by the industry. This implies that in perfect competition, the market price of products is determined by taking into account two market forces, namely market demand and market supply.
In the words of Marshall, “Both the elements of demand and supply are required for the determination of price of a commodity in the same manner as both the blades of scissors are required to cut a cloth.” As discussed in the previous chapters, market demand is defined as a sum of the quantity demanded by each individual organizations in the industry.
On the other hand, market supply refers to the sum of the quantity supplied by individual organizations in the industry. In perfect competition, the price of a product is determined at a point at which the demand and supply curve intersect each other. This point is known as equilibrium point as well as the price is known as equilibrium price. In addition, at this point, the quantity demanded and supplied is called equilibrium quantity. Let us discuss price determination under perfect competition in the next sections.