EQUILIBRIUM OF FIRM AND INDUSTRY UNDER PERFECT COMPETITION
In the previous chapter, we have discussed in detail the conditions of equilibrium or a firm and industry, As mentioned earlier, our analysis in regard to thc equilibrium in the last general terms and nut with reference to any particular market form, ow III the I rc cnt chapter, we shall discuss the conditions of equilibrium uf the firm and industry under conditions of perfect competition. In chapter ~2. the meaning and conditions of perfect competition have already been Perfect competition, as explained there, refers to a situation when:. number seller \ and buyers is very large; ii, Products arc homogeneous: (1/1/ Both producer Firms) and consumers possess perfect knowledge about the prevailing price and current
Similarly. the buyers or consumers of the product are also numerous and a single buyer’s demand for the product is so small that changes in it cannot have any perceptible effect on the total demand and hence on the price of the product of that industry. Thus. under perfect competition, an individual finn or individual buyer acts as if he had no influence on price and merely adjusts to a given market price. The second condition ensures that all Ions arc producing goods which are accepted by consumers or buyers as homogeneous or identical. It means that product of onc firm is indistinguishable from the products of other firms in the industry. Trade marks. patents, special brand labels. etc., do not exist. The control over price is completely eliminated only when all firms arc producing perfectly homogeneous goods, since if the product of anyone firm is slightly different from that of others, it would have a degree of CONtrol over the price of his own brand. Thus, if there is to be 110 control over the price of the product by any one producer. the products must he homogeneous. It should he carefully noted that whether or IJOt. products arc homogeneous should be judged from the viewpoint of the consumers. If thc consumers (or buyers) find some imaginary differences between the products, their prices arc bound to diller, however, physically alike the products may be. Anything which makes thc buyers prefer one seller to another, be it personality reputation, convenient location, or thc tone of his shop, differentiates the product purchased to the extent, since what is bought is really a bundle of utilities of which these things are a part. The utilities offered by all sellers to all buyers must be identical. otherwise individual sellers will have a degree of control over their individual prices. “Under such condition it is evident that buyers and sellers will be paired in random fashion in a large number of lI~transactions. It will be entirely a matter of chance from which seller a particular buyer makes his purchases, and purchases over a period of time will be distributed among all sellers according to the law of probability. After all. this is only another way of saying that the product is homogeneous.”‘ The third condition guarantees that buyers and sellers rue fully aware or the prevailing price in the market. Since there are no uninformed buyers, sellers cannot attempt to charge more than thc prevailing price. Consumers cannot hope to buy from SOIl producers at less than thc prevailing price for suuila: reasons. If any seller tries to charge a higher price than the prevailing market price, the buyers will shirt to some other seller and buy the commodity at the ruling puce, since they are supposed to know the prevailing mallet rice. The consumers will refuse to buy the Commodity a’ the higher price. Thc above three conditions en UI thJI a single price must prevail in the market un I rfect competition sion and, further, that the dcman l curvc (If average revenue curve faced by an Individual IIr II under perfect competition is perfectly cia uc at the prevailing market price.
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