question_answer

Explain the implications of the following features of perfect competition.

(i) Large number of buyers and sellers,

(ii) Freedom of entry and exit of the firm.

Answer:

(i) Very Large Number of Buyers and Sellers A perfectly competitive market is dominated by very large number of buyers and sellers of a commodity. It means that there is no such buyer or seller in the market whose purchase or sale is so large as to impact the total sale or purchase in the market. Each buyer and seller has only a fractional share in the market demand and market supply respectively. Each buyer and seller has to accept the price as it is in the market. Therefore, it is said that a firm under perfect competition is a price taker not a price maker. (ii) Freedom of Entry and Exit of Firm Under perfect competition, a firm can enter or leave the industry anytime. In order to analyse the, implications of this feature, we need to focus on short period and long period situation. Short period by definition, is too short for an existing firm to leave the industry or for a new firm to join the industry. Accordingly, the significance of this feature is restricted only to long period situations. Because of free entry and exit, firms in the long-run earn only normal profits. In case, extra normal profits are earned, new firms will join the industry. In this case, market supply will increase, market price will fall and extra normal profits will be wiped out. In case of extra normal losses, some of the existing firms will leave the industry. Market supply will decrease, market price will increase and extra normal losses will be wiped out. Hence, there will be neither supernormal profits nor losses in the long- run.