Class 11 Micro Economics Notes · CBSE
Perfect Competition
Perfect Competition — understanding a market with a very large number of buyers and sellers, a homogeneous product and a price fixed by the market. CBSE Class 11 Microeconomics notes with demand-curve graphs.
Last updated: 15 Sep 2026
Notes
Meaning and Example
In the perfectly competitive market, sellers sell a homogeneous product at a single uniform price.
The price is not determined by a particular firm but by the industry.
Features of Perfect Competition
In a perfectly competitive market, there are a very large number of buyers and sellers. Implication:the number of sellers is so large that the share of each seller is insignificant in the total supply. Hence, an individual seller cannot influence the market price. Similarly, a single buyer's share in total purchase is so insignificant that an individual buyer cannot influence the market price. Due to this reason, a firm is just a price-taker as it has no option but to sell the product at the price determined by the industry. Similarly, a buyer is also a price-taker as he cannot influence the market price by changing the demand. Under such conditions, the price of a commodity is determined by the market forces of demand and supply and each buyer and seller has to accept the same price. As a result, a uniform price prevails in the market.
The products offered for sale in the market are homogeneous, i.e., the product sold is identical in all respects like size, shape, quality, color, etc. Since each firm produces 100% identical products, their products can be readily substituted for each other. So, the buyer has no specific preference to buy from a particular seller only. Implication: buyers treat the products as identical. Therefore, the buyers are willing to pay only the same price for the products of all the firms in the industry. It also implies that no individual firm is in a position to charge a higher price for its product. This ensures a uniform price in the market. Due to the homogeneity of goods, purchase of a commodity is a matter of chance and not of choice.
Every seller has the freedom to enter or exit the industry. There are no artificial and natural barriers for entry of new firms and exit of existing firms. It ensures the absence of abnormal profits and abnormal losses in the long run. Short period, by definition, is too short for an existing firm to leave the industry or for a new firm to enter into the industry. The long period is long enough for the existing firm to leave the industry or for the new firm to enter the industry. Implication of 'Freedom of Entry': when the existing firms are earning abnormal profits, the new firms, attracted by the prospects of profit, enter the industry. This raises market supply, which in turn, leads to a fall in market price and consequently profits. The entry continues till each firm is earning just the normal profits. Implication of 'Freedom to Exit': the firms try to leave when they are facing losses. As the firms start leaving, market supply falls, leading to a rise in market price and consequently a reduction in losses. The firms continue to leave till the losses are wiped out and each existing firm is earning just the normal profits.
Perfect knowledge means that both buyers and sellers are fully informed about the market price. Its implication is that no firm is in a position to charge a different price and no buyer will pay a higher price. As a result, a uniform price prevails in the market. Both buyers and sellers have perfect knowledge about the product market. Sellers also have perfect knowledge about the input markets, i.e. each firm has an equal access to the technology and the inputs used in the production. As a result, all the firms have a uniform cost structure. Since, there is uniform price and uniform cost in case of all firms, all the firms earn uniform profits.
The factors of production (land, labor, capital and entrepreneurship) are perfectly mobile. There is no geographical or occupational restriction on their movement; the factors are free to move to the industry in which they get the best price.
In order to ensure a uniform price in the market, it is assumed that transportation costs are zero. A producer can sell his product at any place and a buyer can buy it from the place he likes.
Selling cost refers to the cost of advertisement of the product. In perfect competition, there are no selling costs because products are homogeneous in nature and there is perfect knowledge amongst buyers and sellers.
Normal Profits, Abnormal Profits and Abnormal Losses
These three terms arise out of the freedom of entry and exit feature of perfect competition (feature 3 above).
Normal Profits
Normal Profits refer to minimum profits, which are needed to carry out the business. The total production costs of a firm include the normal profits.
Example: a tuition teacher needs at least ₹20,000 a month to cover rent, bills and family needs — that minimum is his normal profit, already built into his cost.
Abnormal Profits
Abnormal Profits refer to an excess of earnings over the total production costs.
Example: the same teacher earns ₹40,000 a month after students flock in — the extra ₹20,000 above normal profit is abnormal profit.
Abnormal Losses
Abnormal Losses refer to a shortage of earnings over the total production costs.
Example: a new café earning ₹30,000 against costs of ₹45,000 runs an abnormal loss of ₹15,000 a month.
Pure Competition vs Perfect Competition
Perfect Competition is used in a wider sense compared to Pure Competition.
Competition is considered 'Pure Competition' when these 3 fundamental conditions are met: (1) Very large number of buyers and sellers; (2) Homogeneous product; (3) Freedom of entry and exit.
Perfect competition is a broader concept. For a market to be perfectly competitive, in addition to the three fundamental conditions, these four additional conditions must be satisfied: (1) Perfect Knowledge among buyers and sellers; (2) Perfect mobility of factors of production; (3) Absence of transportation costs; (4) Absence of selling costs.
Pure Competition — 3 Fundamental Conditions
- 1.Very large number of buyers and sellers
- 2.Homogeneous product
- 3.Freedom of entry and exit
Perfect Competition — 3 + 4 Additional Conditions
- 1.Very large number of buyers and sellers(same three conditions)
- 2.Homogeneous product(same three conditions)
- 3.Freedom of entry and exit(same three conditions)
- Perfect Knowledge among buyers and sellers
- Perfect mobility of factors of production
- Absence of transportation costs
- Absence of selling costs
Firm is a Price-taker — Firm vs Industry
Industry — Price Maker
Firm — Price Taker
Fig 10.1 — Market demand and supply fix the price OP (left); the firm sells any quantity at OP (right).
A firm plays no role in price determination. It can affect neither the supply nor the demand in the market. So, 'Firm is a price-taker and Industry is the Price-maker'.
Each firm has to accept the price as determined by market forces of demand and supply. Price is determined at the point where the market demand curve intersects the market supply curve.
In Fig 10.1, the market demand curve DD and market supply curve SS intersect at point E, at which OP price is determined.
The price of OP is adopted by the price-taker firm, and the firm is free to sell any quantity (OQ, OQ₁ or any other quantity) at this price.
This makes the AR curve perfectly elastic and thus parallel to the X-axis. According to the AR and MR relationship, when AR is constant, MR = AR. So, the AR curve is also the MR curve of the firm.
Demand Curve under Perfect Competition
In case of perfect competition, there are a very large number of buyers and sellers selling a homogeneous product at a price fixed by the market. Therefore, each firm is a price-taker and faces a perfectly elastic demand curve.
In Fig 10.2, output is represented along the X-axis and price and revenue along the Y-axis. The firm's demand curve is indicated by the horizontal straight line parallel to the X-axis.
As each firm has to accept the price fixed by the industry, the price is determined at OP. At OP price, a seller can sell OQ₁, OQ₂ or any other quantity. However, a firm is not in a position to change the price.
The demand curve has an elasticity of demand Ed = ∞ (infinity) — perfect elasticity.
It must be noted that the AR curve and demand curve are one and the same thing as discussed in the chapter 'Revenue'.
Fig 10.2 — Demand Curve of a Firm under Perfect Competition
MR = AR under Perfect Competition
In the perfectly competitive market, each firm is a price-taker. All the firms have to accept the same price as determined by market forces of demand and supply. As a result, a uniform price prevails in the market.
It means, revenue from every additional unit (known as MR) is equal to the price (AR) of the product. So, MR = AR.
Under Perfect Competition
Long-run Equilibrium under Perfect Competition
In the long run, a firm under perfect competition earns normal profits due to freedom of entry and exit.
AR = MR and both coincide in a horizontal straight line parallel to X-axis (see Fig 10.5).
The conditions for equilibrium — 'MR is equal to LMC' and 'LMC curve cuts the MR curve from below' — are satisfied at point E.
Point E is the equilibrium position of the firm at which the equilibrium output is OQ at the price of OP.
Corresponding to this, LAC = AR. So, the firm will be earning only normal profits.
Fig 10.5 — Long-run Equilibrium under Perfect Competition
Key Takeaways
Key Takeaways
- Perfect competition: a very large number of buyers and sellers dealing in a homogeneous product at a price fixed by the market — each firm is a price-taker. ⭐
- The seven features are: very large numbers, homogeneous product, freedom of entry and exit, perfect knowledge, perfect mobility of factors, absence of transportation costs and absence of selling costs. ⭐
- Entry of new firms wipes out abnormal profits and exit of loss-making firms wipes out abnormal losses — only normal profits survive in the long run. ⭐
- Pure competition rests on 3 fundamental conditions; perfect competition adds 4 more (perfect knowledge, perfect mobility, no transport costs, no selling costs). ⭐
- The industry is the price-maker; the firm is a price-taker — price is set where market demand meets market supply. ⭐
- The firm faces a perfectly elastic (horizontal) demand curve with AR = MR = Price; it can sell any quantity at that price. ⭐
- Long-run equilibrium: MR = LMC with LMC cutting MR from below, and LAC = AR — only normal profits. ⭐