Classification of Market and Perfect Competition
Market is an institution in which exchange of both goods and services takes place as a result of direct and indirect interaction between buyers and sellers.
The main determinants of Market are: nature of commodity, number of buyers and sellers, knowledge of market and mobility of factors of production.
Market can be classified on the basis of: area, time, transaction, function, quantity, control, competition, etc.
Market structure refers to number of firms operating in the market and the nature of competition amongst them. It can be perfectly Competitive or Imperfectly Competitive. The main types of imperfectly competitive markets are: Monopoly, Monopolistic Competition and Oligopoly.
Perfect competition is a market situation where there is large number of buyers and sellers, dealing in identical products and there is no control over price by an individual firm. Large number of buyers and sellers, homogenous products, free entry and exit, perfect knowledge of product, perfect mobility of factors of production and absence of transport cost are the salient features of perfect competition.
Under perfect competition as a firm is a price taker and accepts the price determined in the industry, the price maker. Owing to this reason demand curve faced by a firm under perfect competition is perfectly elastic.
The equilibrium condition of a firm under perfect competition by Total Revenue (TR) and Total Cost (TC) approach is that the difference between TR and TC should be Maximum
The equilibrium condition of a firm under perfect competition by Marginal Revenue (MR) and Marginal Cost (MC) approach is
MC = MR
MC is rising and cuts MR from below.