Solution:

Perfect Competition:

• It is such a market structure where there is a large number of buyers and sellers of a homogeneous product and the price of the product is determined by the industry.

• There is one the price that prevails in the market. All firms sell the product at the prevailing price. In other words, a perfectly competitive firm is too small and insignificant to affect the market price like a wheat farmer.

• He is a price taker who can sell all he wishes to sell at the ruling market price. In terms of elasticity of demand, a perfect competitor faces a horizontal demand curve (parallel to the X-axis) for his product, the coefficient of elasticity is infinite.

The main characteristics of perfect competition are as follows:

(1) Large number of buyers and sellers:

• There is a large number of buyers and sellers of a commodity under perfect competition but each buyer and each seller is so small in comparison with an entire the market of products that they cannot influence the market price by changing the quantity of the product sold by him.

• If a seller supplies the entire stock of the product produced by him the total supply will not increase to such as extent as to lower the price and on the other hand, if he withdraws from the market the total supply will not fall to such an extent as to raise the price.

• Thus, every seller has to accept the prevailing price. Hence a uniformity of price is there under perfect competition and as a consequence of uniform price prevailing in the market average revenue (AR) or the price of the product is equal to the marginal revenue (MR) as shown in diagram .7. Average revenue is the total sales proceeds of the product divided by the total production.

(2) Homogeneous Product:

• The second important characteristic of the perfectly competitive market is that the product sold by the various firms are homogeneous.

• The products are homogenous in the sense that they are perfect substitutes from the buyer‘s point of view. The sellers do not spend on advertisement and publicity etc. because all the firms sell a homogeneous product.

(3) Absence of artificial Restrictions:

• The third major characteristic of perfect competition is the non-existence of any artificial restrictions on the demands, supplies, prices of goods, and factors of production in the market. There must not be any external intervention in price fixation and any controls on the product.

(4) Free entry and exit:

• The fourth characteristic of perfect competition is free entry and free exit for the firms in a perfectly competitive market. The firms are free to enter or exit the industry whenever they want to do so. Any firm can enter or leave the industry at any time as there are no legal restrictions.

(5) Perfect knowledge about the market:

• There is perfect knowledge on the part of buyers and sellers about market conditions. The buyers and sellers are fully aware of the price prevailing in the market. Due to this awareness, all the firms charge prices from the buyers.

(6) Perfect mobility of the factors of production:

• The existence of perfect mobility of the factors of production is another important characteristic of the perfect competition for its smooth functioning.

• It means all the factors of production are perfectly mobile in a perfectly competitive market. Factors will move to the industry which pays the higher remuneration.

(7) Non-Existence of transportation cost:

• A perfectly competitive market also assumes the character of the non-existence of transport costs as uniform price prevails throughout the market. There must be no transportation cost across different areas of the market.

• Thus, the existence of a single uniform price is an essential feature of a perfectly competitive market and a single uniform price for the the same product cannot exist in the market if transportation costs are taken into account.