The firm’s problem is then, to decide whether to produce at all, and, if so, how much to produce in order to maximise profit. It faces a price that is determined by market forces which are beyond its control. Hence, each perfectly competitive firm acts as a price-taker. The firm is also so small a part of the market that it cannot exert any perceptible influence on market price. In pure competition, an individual firm produces a product which is the same as those of other firms. In order to develop a theory of commodity, pricing and output determination under pure competition, we have to derive, at the outset, the demand curve faced by the firm. There are no restrictions on exit, legal or otherwise. Freedom of exit means that any existing firm is free to stop production and leave the industry if it so desires. There are no legal or other restrictions on entry.
There are no barriers to the entry of new firms in the industry. Freedom of entry means that a new firm is free to start production if it soĭesires. The fourth assumption relates to the whole industry. (iv) Freedom of Entry and Exit:Īssumptions 1, 2 and 3 relate to individual firms. Hence price prevails in all parts of the market.
This is because people will not buy a commodity from a firm at one price if they know that the same product can be obtained at a lower price from another firm. As a consequence, if any firm raises the price of its (homogeneous) product above the prices charged by other producers, it is sure to lose all its customers. When buyers of the product are fully informed about the prices and qualities of goods offered for sale by sellers, they are said to have perfect information.
Of course, the power is not unlimited (because there are other producers of cars), but it certainly exists. The company does have the power to influence price by varying the number of cars it produces. In contrast, Maruti Udyog’s car output is a significant part of total car production in India. He could double his production, or produce some other crop with no large effect on the total market supply, and, therefore, the price of carrots.