Price Determination in Perfect Competitive Markets: An Economics Essay

This essay provides a comprehensive analysis of price determination within perfectly competitive markets. It begins by explaining the concept of market equilibrium, where supply and demand intersect to establish the equilibrium price. The essay delves into the dynamics of supply and demand, illustrating how shifts in these curves impact the equilibrium price and quantity. It explores the factors that influence these shifts, including consumer income, prices of related goods (substitutes and complements), population size, consumer preferences, and expectations. The discussion incorporates relevant examples to clarify these concepts. The essay emphasizes the role of sellers as price takers in perfect competition due to the ease of entry and exit, and the homogeneity of products. The essay concludes by summarizing the key points, reinforcing the understanding of how various factors interact to shape prices in a competitive market setting.

PRICE
DETERMINATION

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Explain how prices are determined in perfect competitive markets and discuss with examples
what causes them to change.........................................................................................................3
What factors causes the equilibrium price to change..................................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The market equilibrium is important aspect for the determinisation of price of specific good in
the market. In the market, there are two set of forces tending in the opposite directions that’s is
demand and supply. There is subject of fluctuation which tend to have the increase of decrease
in the demand and supply curve. In this report, there will be discussion on how the prices are
determined in perfect competitive markets and discuss with examples what causes them to
change. In addition to that’s the discussion on different factor which are effecting the equilibrium
price to change.
MAIN BODY
Explain how prices are determined in perfect competitive markets and discuss with examples
what causes them to change.
Figure 1 Price equilibrium
(Source: price equilibrium, 2017)
how prices are determined in perfect competitive markets
In economics, economic equilibrium is a situation in which economic forces such as
supply and demand are balanced and in the absence of external influences the values of
economic variables will not change. In order to analyse and determine the equilibrium related to
price the individual needs to analyse on which price the supply and demand curve can be

intersected. It has also been analysed that when the demand and supply curve intersects the
market can be said to be in equilibrium (Bennett & Yuan, (2017). It has also been analysed that
in perfect competition the prices are been determined at the point where the demand and supply
curve intersects. The point can be known as the equilibrium point and the price can also be
known as the equilibrium price. There are various factors which can also affect the equilibrium
of the price. The demanded and quantity and supplied quantity can be called as equilibrium
quantity. In the perfect competition, the demand can be defined as that the willingness of
consumers to buy when the other factors remain constant and do not change. It has also been
analysed that customers are been involved in demanding the products at lower price and also
they demand less when the price is higher. In perfect competition supply can be defined as the
willingness of producers to supply at the particular price. These conditions of supply and demand
exists in the perfect competition. It has also been analysed that in perfect competition the sellers
and firms are been considered as the takers of price. Here MC is the marginal cost and AC is the
average cost and the prices are being determined by the forces of market that is demand and
supply. The line of demand is equal to the marginal revenue and it is also being taken as equal to
price value. The market demand can be defined as the overall total demand for the product which
consumers are willing to buy and pay. The prices are being determined in the perfect competition
where the demand and supply intersect at that point the prices are being determined. In the
perfect competition there are so many sellers as in this market anyone can easily enter as well as
exit. The products are also considered as identical from one seller to another that’s why they are
been considered as the price takers (Sinha & Adhikari, (2018). All these conditions exist in the
perfectly competitive market and this way prices are being determined under it. The
determination of price basically means that at what price the cost of goods are being determined
and sold off. It has also been evaluated that in the free market condition, the prices are being
analysed with the help of demand and supply. It has also been evaluated that government does
not interfere in the decision of price determination. In the perfect competition, the sellers have no
control over the market. It has also been analysed that in perfect competition both buyers and
sellers are considered to be important. If one of them is not present, then it is practically not
possible to determine the price and it has also been analysed that in perfect competition the cost
of good is one of the most important factors which affects the equilibrium price. It has also been
analysed that in the short run, equilibrium can be affected by the demand.

What factors causes the equilibrium price to change
Several forces tend to have brought about their respective changes in the demand and supplies
which are constantly working which tends to have the causes in the change in the market
equilibrium which have constantly looking about the prices and quantities. The demand may
have increase and decreases, the supply curves have been remaining unchanged which have he
change in equilibrium prices and quality.
As the key point to have to be noticed as demand curves can have shift and the Ceteris paribus
assumption (Mokana, 2016). The demand curves have the shift as the change in factors such as
the average incomes and the preferences can have the cause in the entire demand curve to the
shift right or left. This have the causing the higher and lower quality to be demanded on the
given rice in the prefect manner.
Income of the consumer
It is one of the important factors which is affecting the equilibrium as the costumer have
increase have the impacts on the superiors of goods rather than the inferior goods in perfect
manner. The insignificants increase in the disposable incomes which is enabling the consumer to
have the effecting on the equilibrium in perfect manner (Möller and et.al.,2018). The higher
level of incomes which have the occurrence in terms of varsity of reason such as the higher
wages and lower taxes in perfect manner. It has also been analysed that when the demand and
supply curve intersect the market can be said to be in equilibrium. The point can be known as the
equilibrium point and the price can also be known as the equilibrium price. There are various
factors which can also affect the equilibrium of the price. For example, if the income of the
consumer tends to increase, there will increase in the demand of the superiors products and

decrese in demand of inferior. Thei will make the demand curve move forward and increase the
price of respective product.
Price of related goods
Substitute goods
There is the decline in the price of the one goods lead and decrease the demand of others as
well-known level of combinations as the per will be shift aiming the costumer who’s in price to
be decrease and quantity of other increase. This will have the shift in equilibrium at the instance
level. For example – Tea and coffer are substitute goods, the change in price of one will be make
change in price of another.
Complementary goods
This have the category, the increase in the price of one good will increase the demand of other
goods. This will have the change in the equilibrium in the perfect manner (Moon, 2018). Hence
the demand of the supply of the goods will be moving from shirts and rightwards and leftward
movement.
Size of population
Size of the population have the major level of impact on the equilibrium as to the maximum
level as the population increases, the demand has of the certain product have the increases. This
will make the disbalance in the equilibrium (Benjamin, 2018). In order to have maintaining the
balance the increase in the supply will have this shift in create the balance in equilibrium. These
conditions of supply and demand exists in the perfect competition. It has also been analysed that
in perfect competition the sellers and firms are been considered as the takers of price. For
example- It has also been analysed that when the demand and supply curve intersect the market
can be said to be in equilibrium. In the size of consumer have increase in the demand of the
product ,the price will increase ad make change in equilibrium.
Taste and preferences
There is the factor which is affecting in the factors having the mainly level of dependence
regarding the preference of the taste and preferences of the consumers. This will be trend which
is affecting the industry as the demand arises as the fashion have the leaving the is reverse level
of impacts on the demand and supply (Menezes and Quiggin, 2017). The market demand can be
defined as the overall total demand for the product which consumers are willing to buy and pay.
The prices are being determined in the perfect competition where the demand and supply

intersect at that point the prices are being determined. For example- the change in the trends of
eating food will make the increase in demand at the present moment of time and in respect to that
price is determines. The less supply will make increase in the price of healthy food
Demand > supply will result in the increase in the price
Demand < supply will result in the decrease in the price
Change in the expectation
The commodity has the future level of expectations have been bought due to the prices of the
speculative reason in order to have the expectation to make the increase or decreasing the price
have the significant impacts on the equilibrium in perfect manner (Çelik, Bilen and Bilen, 2016).
Due to have the influences as the demand or supply have the respective level of changes as the
consequently have resulting the significant demand curve shift. The point can be known as the
equilibrium point and the price can also be known as the equilibrium price. There are various
factors which can also affect the equilibrium of the price.
CONCLUSION
From the above study it has been summarized that the prices are been determined in perfect
competition at the point where the demand and supply curve intersect. It has also been analyzed
that their factors affecting the equilibrium price and also causing it to change. It has been
analyzed that in perfect competition, sellers are the price takers. This is because in perfect
competition there has been an easy entry and exit, so products sold are likely. The line of
demand is equal to the marginal revenue and it is also being taken as equal to price value. It has

also been analyzed that in perfect competition the prices are been determined at the point where
the demand and supply curve intersect. It has also been analyzed that in short run the price
equilibrium is affected by demand. This will be trend which is affecting the industry as the
demand arises as the fashion have the leaving the is reverse level of impacts on the demand and
supply.

REFERENCES
Books and Journals
Sinha, R. K., & Adhikari, A. (2018). Buyer-seller amount-price equilibrium for prepaid services:
Implication for promotional pricing. Journal of Retailing and Consumer
Services. 44.285-292.
Bennett, M., & Yuan, Y. (2017). On the price spread of benchmark crude oils: A spatial price
equilibrium model. Available at SSRN 2894389.
Mokana, M.K., 2016. Individual, organizational and environmental factors affecting work-life
balance (Doctoral dissertation, Universiti Utara Malaysia).
Benjamin, B., 2018. Social and economic factors affecting mortality (Vol. 5). Walter de Gruyter
GmbH & Co KG.
Çelik, R., Bilen, B. and Bilen, Ö., 2016. The impacts of changes in macro-economic data on net
working capital: the case of turkey's industrial sector. 5TH ISTANBUL CONFERENCE
OF ECONOMICS AND FINANCE.
Menezes, F.M. and Quiggin, J., 2017. The Strategic Industry Supply Curve (No. 584).
Möller, B and et.al.,2018. Heat Roadmap Europe: Identifying local heat demand and supply
areas with a European thermal atlas. Energy, 158. pp.281-292.
Moon, M.A., 2018. Demand and supply integration: The key to world-class demand forecasting.
Walter de Gruyter GmbH & Co KG.
Online
Price equilibrium. 2017. [ONLINE] available through: <
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perfect-competition/4092#:~:text=In%20perfect%20competition%2C%20the
%20price,supplied%20is%20called%20equilibrium%20quantity.>

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