In a perfect competition, there are many sellers as well as buyer. Price is determined by enormous bargaining. In this market condition, producers can entry and exit easily. The goods are identical and homogeneous and price of the good is same everywhere. The demand of a good depends on the marginal utility. Buyers pay the maximum price for a good while the price of a good is equal to the marginal utility derived from that good. This price represents the buyers’ willingness to pay for demand of the good. On the other hand, supply of a good depends on the marginal cost of that good. A firm is willing to supply at the lowest price while the price of the good is equal to its marginal cost of production. This low price is the supply price of the firm. The equilibrium price determined at the point where the demand and supply price of the buyers and sellers respectively are equal. In perfect competition market, the price is fixed by ups and downs of demand and supply.
The price determination is shown in a tabular
format below:
|
P |
D |
S |
Relationship of D and S |
Pricing status |
|
20 |
200 |
1000 |
D<S |
|
|
18 |
400 |
800 |
D<S |
|
|
16 |
600 |
600 |
D=S |
Equilibrium
price |
|
14 |
800 |
400 |
D>S |
|
|
12 |
1000 |
200 |
D>S |
|
The list is presented in the below drawn
diagram:
Thus the price of a good is determined
through stages of ups and down of the demand and supply of that good.