Price determination in perfectly Competitive Markets
A perfectly competitive market is rare in the modern world. It can be said that this is not the case in the industrial sector. Similarly, a monopolistic market is rare in the private sector. Markets between these two are widely prevalent. Monogamous power exists in all these in varying degrees. It results in misuse of resources. Marginal cost pricing method is followed in public sector organisations to prevent such misuse of resources. Only short- run marginal cost considerations come into play. The net social benefit is maximised. Because many industries have credit exposures, marginal costs of exposure are subsumed under social marginal costs. If that happens, over production will be reduced and social benefit will be achieved. In industries that follow the marginal cost pricing system, long- run costs are declining and they incur losses. Burying them is difficult. Marginal cost measurement is complicated. Full cost pricing approach is followed to overcome the above mentioned difficulties. This policy is widespread in all sectors and industries across countries. It is known that average cost is obtained by dividing the total cost with the product. Real costs are higher than ability costs due to ownership isolation, contributing to X- inefficiency. Adding higher costs to the price increases the price level. This is how cost- induced inflation occurs. Direct and indirect taxes levied on companies are also passed on to consumers by raising prices. This can be termed as tax induced inflation. For the above reasons average cost pricing theory cannot be said to be better than marginal cost pricing theory. In perfectly competitive industries, long- run cost equals marginal, average cost.
The price is not fixed by any single company in the industry. All firms accept the price determined in the market.(Similarly, the number of consumers is as large as the number of these firms. Firms, Competition among consumers is perfect. Hence such markets got that name. Chronic These firms can only make normal profits when price equals marginal and average costs. price, Differences between costs may occur in the short term. This can result in high profits or losses. Profits When new firms enter the industry. Production increases. Thus reducing the price and higher profits disappears. Disadvantages include weak firms exiting the industry, resulting in lower output and lower prices increases. Thus normal profits are added. If the goods are available at the marginal cost price of the consumer The benefit is maximised. Perfectly competitive markets are rare in the world. The most common ones are imperfect competition
A perfectly competitive market is rare in the modern world. It can be said that this is not the case in the industrial sector. Similarly, a monopolistic market is rare in the private sector. Markets between these two are widely prevalent. Monogamous power exists in all these in varying degrees. It results in misuse of resources. Marginal cost pricing method is followed in public sector organisations to prevent such misuse of resources. Only short- run marginal cost considerations come into play. The net social benefit is maximised. Because many industries have credit exposures, marginal costs of exposure are subsumed under social marginal costs. If that happens, over production will be reduced and social benefit will be achieved. In industries that follow the marginal cost pricing system, long- run costs are declining and they incur losses. Burying them is difficult. Marginal cost measurement is complicated. Full cost pricing approach is followed to overcome the above mentioned difficulties. This policy is widespread in all sectors and industries across countries. It is known that average cost is obtained by dividing the total cost with the product. Real costs are higher than ability costs due to ownership isolation, contributing to X- inefficiency. Adding higher costs to the price increases the price level. This is how cost- induced inflation occurs. Direct and indirect taxes levied on companies are also passed on to consumers by raising prices. This can be termed as tax induced inflation. For the above reasons average cost pricing theory cannot be said to be better than marginal cost pricing theory.
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