Basic Economic Principles … Opportunity cost principle … Incremental concept /principle … › Economics Basics
Basic Principles of Economics, Market Structures and Cost Analysis
Basic Principles of Economics:
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Basic Economic Principles
Economic theory offers a variety of concepts which can be of considerable assistance to the managers in decision-making practices. These tools are helpful for managers in solving business-related problems. These are thus taken as guides in making decisions. The following arc the basic economic tools for decision-making:1. Opportunity cost principle
2. Incremental concept/principle
4. Discounting principle
5. Equi-marginal principle.
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Opportunity cost principle
Opportunity cost principle is related and applied to scarce resource. When there are alternative uses of scarce resource, one should know which best alternative is and which is not. We should know what gain by best alternative is and what loss by left alternative is.Devenport. an American Economist explains the concept of opportunity cost with reference to an example. Suppose a girl had two kinds of fruits- one pear and one peach, and if a bad boy is after her to seize the fruits, then the best way for the girl is to drop one fruit and run with the other, so that, she can at least save one fruit, at the cost of the other. When the girl so drops by the way - side one fruit and runs with the other, then the opportunity cost of the fruit she saves is the foregone alternative of the fruit she lost. This is the opportunity cost theory.
The concept of opportunity cost plays an important role in managerial decisions. This concept helps in selecting the best possible alternative from among various alternatives available to solve a particular problem. This concept helps in the best allocation of available resources.
The opportunity cost of any action is simply the next best alternative to that action - or put more simply, "What you would have done if you didn't make the choice that you did".
The income or benefit foregone as the result of carrying out a particular decision, when resources are limited or when mutually exclusive projects are involved.
Definitions
— In the words of Left witch, "Opportunity cost of a particular product is the value of the foregone alternative products that resources used in its production, could have produced."Opportunity cost is not what you choose when you make a choice —it is what you did not choose in making a choice. Opportunity cost is the value of the forgone alternative — what you gave up when you got something.
Example 1: If a person is having cash in hand Rs. 100000/-, he may think of two alternatives to increase cash.
Option 1: Investing in bank. We will get returns amount 10000/-
Option2: Investing in business. We get returns amount 17000/-
Generally we chose the option 2 because we will get more returns than the option 1. Here the option 1 is the opportunity cost, that what we have not chosen.
Example 2: I have a number of alternatives of how to spend my Friday night: I can go to the movies; I can stay home and watch the baseball game on TV, or go out for coffee with friends. If I choose to go to the movies, my opportunity cost of that action is what I would have chosen if I had not gone to the movies - either watching the baseball game or going out for coffee with friends. Note that an opportunity cost only considers the next best alternative to an action, not the entire set of alternatives.
The opportunity cost of a decision is based on what must be given up (the next best alternative) as a result of the decision. Any decision that involves a choice between two or more options has an opportunity cost.
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Incremental concept /principle
The main objective of this principle is maximization of profits. Or In other words to raise the profits in the businessGeneral rule:
By increasing in the production, the total cost of the product raises and simultaneously profit also rises.Practicality in the business:
How much we extra we should produce to get the best profits and how much extra cost is incurring for the extra production.
It is related to the marginal cost and marginal revenue concepts in economic theory. Incremental concept involves estimating the impact of decision alternatives on costs and revenues, emphasizing the changes in total cost and total revenue resulting from changes in prices, products, procedures, investments or whatever else may be at stake in the decisions. The two basic components of incremental reasoning are:
1. Incremental cost
2. Incremental revenue.
Incremental cost may be defined as the change in total cost resulting from a particular decision. Incremental revenue is the change in total revenue resulting from a particular decision.
The incremental principle may be stated as follows: A decision is a profitable one if—
a) it increases revenue more than cost
b) it decreases some costs to a greater extent than it increases others
c) it increases some revenues more than it decreases others and
d) it reduces cost more than revenues.
Suppose a firm gets an order that brings additional revenue of Rs 3,000. The cost of production from this order is:
Rs
• Labour 800
• Materials 1,300
• Overheads 1,000
• Selling and administration expenses 700
Full cost 3,800
At a glance, the order appears to be unprofitable. But suppose the firm has some idle capacity that can be utilised to produce output for new order. There may be more efficient use of existing labour and no additional selling and administration expenses to be incurred. Then the incremental cost to accept the order will be:
Rs
• Labour 600
• Materials 1,000
• Overheads 800
Total incremental cost 2,400
Incremental reasoning shows that the firm would earn a net profit of Rs 600 (Rs 3,000 – 2,400), though initially it appeared to result in a loss of Rs 800. The order should be accepted.
A simple situation in everyday life provides an example of incremental analysis. Consider a worker leaving work to travel home. Groceries are required and can be purchased at slightly higher prices at a store on the way from the work place to the home, or at lower prices by driving to a store 3 miles (4.82 km) from home. The worker decides to purchase the groceries on the way home since no incremental travel costs are involved, and the incremental difference in grocery prices will be less than the value the worker places on the time and other costs required to drive to the more distant store.
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Principle of time perspective
Principle: “a decision by the firm should take into account of both short-run and long-run effects on revenues and cost & maintain the right balance between the long run and short run.According to this principle, a manger/decision maker should give due emphasis, both to short-term and long-term impact of his decisions, giving apt significance to the different time periods before reaching any decision. Short-run refers to a time period in which some factors are fixed while others are variable. The production can be increased by increasing the quantity of variable factors. While long-run is a time period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumers point of view, short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a time period in which the consumers have enough time to respond to price changes by varying their tastes and preferences.
Eg: ABC is a firm engaged in continuous production of X commodities (long run). In the production process, it is having daily an ideal time (free time) for few hours. In that ideal time, firm can take an order for manufacturing other similar goods instead of wasting time. By manufacturing goods in the ideal time firm does not incur any extra fixed cost like (salaries, wages and rent and) because it is constant. So the fixed cost is absent in the production which is done in the ideal time. Generally in production of goods, fixed and variable cost (raw material & labour) is present. However, here the production made in the ideal time, fixed cost is absent. This shows the cost is reduced in production that is made in the ideal time. Investment made in the business can also be recovered very quickly and in short time.
For example,
Suppose there is a firm with a temporary idle capacity. An order for 5000 units comes to management’s attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for the whole lot but not more. The short run incremental cost(ignoring the fixed cost) is only Rs.3/-. There fore the contribution to overhead and profit is Rs.1/- per unit (Rs.5000/- for the lot)Analysis:From the above example the following long run repercussion of the order is to be taken into account:
1. If the management commits itself with too much of business at lower price or with a smallcontribution it will not have sufficient capacity to take up business with higher contribution.
2. If the other customers come to know about this low price, they may demand a similar low price.Such customers may complain of being treated unfairly and feel discriminated against.
In the above example it is therefore important to give due consideration to the time perspectives. “a decision should take into account both the short run and long run effects on revenues and costs and maintain the right balance between long run and short run perspective”.
Here the principle of time perspective applies, where maintains right balance between long run and short-run markets.
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Discounting principle
This principle talks about comparision of the money value between present and future time.Eg: suppose 1) 100/- is gifted to a particular person today.
2) 100/- will be given as gift to same particular person after one year.
Normally a person chooses first offer only. Why because “today rupee is having more worth than tomorrows rupee”
Business application:
Example 1:In the business, everybody prefers to do cash sale only rather than the credit sale and even they are ready to give cash discount for cash sale. The reason is we will get a rupee today and today’s rupee is more valuable than the tomorrow’s rupee. But In credit sale we will get rupee tomorrow or in the future time and nobody give the discount for credit sale.
Example 2:
We commonly see bank and postal departments adverting that they will give 12% interest for every year on bank deposits what we have invested with them. With this 12% interest for one year, if we want to get 1-lakh rupees after one year, how much we should deposit at present? This question is answered by discounting principle.
In the future if we want to earn 100000/- how much we should invest at present. Example in the bank (100/- @ 12% interest rate of one year)
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How to estimate the purchasing value of the Rupee
The quantity of a commodity that a rupee used to buy years ago has contracted. In other words, the rupee has lost its purchasing power. The reason for this loss is largely macro-economic and linked to aggregate demand and supply dynamics, government borrowings, exchange rate and interest rates. Typically, the rupee loses its purchasing power when there is a general increase in the economy's price level, technically termed as inflation. Inflation is not only a cause of concern for the RBI and the government, it also severely impacts the value of the investment portfolios and can upset any deferred purchase plans.
For example, in 2010, painting your house cost Rs 40,000. You deferred the plan for a year and kept the amount in your savings account. In 2010-11, inflation went up by 9.6% (on an average). So, the expense of the paint job increased to Rs 43,825, but you only have Rs 41,400 in your bank account. Due to the fall in the value of money, you will now need to cough up an extra Rs 2,425 for the same work.
Let us look at how you can estimate the purchasing power of money. This concept rests on the theory of discounting, which is the reverse of the compounding theory. In discounting, the amount receivable at some future date is worked back to the current time period. The future amount is discounted to the current period using a rate known as the discounted yield.
Say, someone promises to pay you Rs 1,000 a year from now. The interest rate offered by your bank is 9%. Using the bank's interest rate as the discounted yield, you can work out the current or present value of Rs 1,000, which comes out to be Rs 917.43. If, instead, you receive Rs 1,000 now, you could invest it at 9% and after one year, you will receive Rs 1,090.
The concept has varied applications in investment and financial planning. It is used by banks for determining the home loan EMIs and is also used by financial planners for estimating the returns from money back insurance policies, mutual fund SIPs and bond yields. Looking at the value of the rupee, the rate of inflation prevailing in the economy is used as the discounted yield for determining its purchasing power. The formula for discounting is given above.
Over the past 21 years, the inflation rate in the country (as measured by the WPI index) has averaged 6.07% annually. Here's how the purchasing value of Rs 100 has changed over these years. In the above formula, 'CV' is Rs 100, 'i' is equal to 6.07% and 'n' equals 21. So, the value of 'RV' will compute to Rs 29.01. This means that what Rs 29 used to buy in 1990-91 will now cost Rs 100. If the above equation appears complicated.
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Equi-marginal principle.
4This is one of the widely used concepts in managerial economics. This principle is also known the principle of maximum satisfaction. According to this principle, an input should be allocated in such a maimer that the value added by the last unit of input is same in all uses. In this way. this principle provides a base for maximum exploitation of all the inputs of a firm so as to maximise the profitability.The equi-marginal principle can be applied in different areas of management. It is used in budgeting. The objective is to allocate resources where hey are most productive. It can be used for eliminating waste in useless activities. It can be applied in any discussion of budgeting. The management can accept investments with high rates of return so as to ensure optimum allocation of capital resources. The equi-marginal principle can also be applied in multiple product pricing. A multi product firm will reach equilibrium when the marginal revenue obtained from a product is equal to that of another product or products. The equi-marginal principle may also be applied in allocating research expenditures.1
Rule:
This principle suggests that available resources (inputs) should be so allocated between the alternative options that the marginal productivity gains (MP) from the various activities are qualized.Definitions
In the words of Ferguson, "Law of equi-marginal utility states that to maximise utility, consumers way allocate their limited incomes among goods and services in such a way that the marginal utilities per dollar (rupee) of expenditure on the last unit of each good purchased will be equal"According to Marshall, "if a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all"
Lipsey is of the view that, "The consumer maximising his utility wilt so allocate expenditure between commodities that the utility derived from the last unit of money spent on each is equal"
Example: students allocating limited available days for existing subjects during examinations for getting best percentage. 14 days to go for examinations and having 7 subjects. Students may not always allot 2 days for each subject, they may allot more days for hard subject and less days for easy subject to maintain good percentage
Example:
Equi-marginal principle is applied in the allocation of the resource in the way of production. Example a farmer is having different four agricultural farms like1. Paddy
2. Mangoes
3. Sugar cane
4. Corns.
The above four agricultural farms are in the total 80 acres, each farm in the 20 acres, all together 80 acres. The farmer is having limited 80 employees with him for employing in the four farms for production. In general, 80 employees are divided and employed for four farms evenly as each farm will be allotted with 20 employees. However, in reality there is no need to allot 20 employees for each farm, because mango farm need less number of employees, whereas paddy farm needs more number of employees. Sugarcane and corn farms require average number of employees. Like shown below
Farms Labour employees
Paddy 30
Mangoes 20
Sugarcane 15
Corns 15
Total 80
The above table reveals the allocation of the resources (labour) available with a farmer according to the production nature and requirement.
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Markets Structures
Market structure is best defined as the organisational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing – but it is important not to place too much emphasis simply on the market share of the existing firms in an industry.In economics, market structure (also known as market form) describes the state of a market with respect to competition. The major market forms are:
1. Perfect competition, in which the market consists of a very large number of firms producing a homogeneous product.
2. Monopolistic competition, also called competitive market, where there are a large number of independent firms which have a very small proportion of the market share.
3. Oligopoly, in which a market is dominated by a small number of firms which own more than 40% of the market share.
4. Oligopsony, a market dominated by many sellers and a few buyers.
5. Monopoly, where there is only one provider of a product or service.
6. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm.
7. Monopsony, when there is only one buyer in a market.
The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions.
The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.
Forms of imperfect competition include:
1. Monopoly, in which there is only one seller of a good.2. Oligopoly, in which there is a small number of sellers.
3. Monopolistic competition, in which there are many sellers producing highly differentiated goods.
4. Monopsony, in which there is only one buyer of a good.
5. Oligopsony, in which there is a small number of buyers.
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Monopoly
The term monopoly is derived from the Greek word monopolin which means exclusive sale. Thus, pure monopoly is market structure in which a single firm is the sole producer of a product for which there are no close substitutes. Since the monopoly is the only seller in the market, it has neither rivals nor direct competitors. For example, you get your electricity supply from one agency, that is. State Electricity Board; you travel by railway train owned and run by government of India. All these are examples of monopoly. Furthermore no other seller can enter the market. In monopoly, there is no distinction between firm and industry. The firm is the industry since it is the only producer in the market. The monopolist is the price maker. He determines the price and this price will determine how much he is able to sell. Its demand curve slopes downward to the right.For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market
DefinitionS
— According to Koutsoyiannls, "Monopoly is a market situation in which there is a single seller, there are no close substitutes for commodity it produces, there are barriers to entry."
— In the words of Baumol, "A pure monopoly is defined as the firm that is also an industry. It is the only supplier of some particular commodity for which there exists no close substitute."
Types of monopoly
1) Pure monopoly and imperfect monopolyPure monopoly there will be a single seller of a product for which there are no close substitutes. It will have absolute monopoly power. We will simply note that because the pure monopolist does not have to worry about competitors in reducing price, it can raise its price without fear that customers will not move to other producers of the same product or similar products In the case of imperfect monopoly there are close substitutes. It has no absolute monopoly power. Imperfect monopolist has to worry about is losing customers to producers of distantly related products.
2) Technical monopoly
Technological monopolies occur when the good or service the company provides is has legal protection in the form of a patent or copyright. For example, if a company develops and patents a drug to cure brain cancer, that company has a legal monopoly over that drug.
Generally big forms have technological monopoly. Example Bajaj Motors Company has the technological monopoly in the DTS-i bike engine technology. And it has taken patent rights for this technology. No other motor company has the right to use DTS-i technology in the manufacturing of engines.
3) Simple monopoly
In the case of simple monopoly, price is charged uniformly to all customers without any discrimination.
4) Discriminating monopoly
Sole producer who charges different prices:a sole producer who divides the buyers' market and charges different prices to different customers
5) Private monopoly public or social monopoly
When an individual or private person controls a firm it is called private monopoly. When production is solely and operated by state or government it is called public or social monopoly. Eg: municipal water supply and power supply by APTRANSCO.
Causes of monopoly
1. Government may grant license to any one person or firm only to operate in the case of public utilities. There are many reasons behind this. Where existence of many firms may misuse the resources and control by many firms over public utilities leads to clashes. Example Gas production, Oil extraction and power generation.2. Producer may have scarce raw material, patent rights, and secret methods of production. In this case producer becomes monopoly. Example Sony corporation is the monopoly in the Walkman technology in mobile phones.
3. Special knowledge so it can produce the same product cheaper
4. Special knowledge so it can produce a new or better product that others can't imitate
Disadvantages
• May restrict the supply of goods which cause the market fluctuation and lead to raise price.
• Consumer choice is restricted in the case of price, quality and quantity. Because these all controlled by the monopoly firm only.
• Less scope in the reduction of price.
• Charges high prices when compare to all markets.
Advantages
• Generally monopoly firm is rich. It can therefore spend sufficiently on Research & Development for product innovation and finding of new technological process and it can introduce new techniques.
• Enables saving in expenditure on advertisement, publicity as this is only the firm in the market and has no competitors.
• As the monopoly firm is financially sound, workers can go for higher pay.
• Large firm has the capability to bear the high cost which involved in the innovation process.
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Duopoly
It is that situation of market in which there are only two producers. While fixing the price, firm takes into consideration the price charged by the other firm producing similar product. If there is no difference between the products of the two firms, then fixation of prices of their products will be governed by firms mutual relation. If both the firms enter into some sort of agreement then they can fix high price like Monopolist On the contrary, if they do not arrive at any agreement, then they will compete with one another as under perfect competition and both will get minimum price. If there exists product differentiation in their products, then the firm having a quality product will be able to charge higher price.Examples where two companies control a large proportion of a market are:
• Pepsi vs Coca-Cola in soft drink market
• Intel vs AMD in the Microprocessor market
• Kodak vs Fujifilm in motion picture film stock market.
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Oligopoly
The word oligopoly is derived from the Greek word "oligo" meaning few and "polo" meaning to sell; it means a market with a few sellers. Oligopoly consists of characteristics of various other markets.To understand about the oligopolistic market we can take the laptops companies, tractors, computer pen drive companies, cellular GSM network providing and car companies (industry) or else satellite TV companies, as the best examples. Here we take DTH as the example as this industry contains few sellers.
Example companies in oligopolistic market
Laptops companies1. Dell
2. Sony vaio
3. Toshiba
4. Hewlett Packard
5. acer
Cellular Phone service providers.
satellite TV Channel service providers
Bike Companies. etc
Characteristics for oligopolistic market
1. All producers produce same type of product.2. All the company’s products are closely related (having similarities) to each other. There won’t be much difference between all the products. As we don’t find much difference between the products like example all the laptops.
3. All products prices under the oligopolistic market will have similar price. There will not be much difference in between the prices of products.
4. All the companies’ products performance and working style will be in similar way.
• Example All the laptop companies use almost similar components; there is no much difference between components for one laptop company to other laptop company and also in performance and working style.
• Batteries perform in same manner.
• Processer in the computer performs in the same manner.
5. Basing on the above line, very high competition exists in this market condition. Because all products under the categories of the oligopolistic market are closely related. Customer buying decision mostly will be based on price of the products
6. Companies spend more for the marketing (advertising) of its products because of high competition in the market to sell their products.
7. New company entering into oligopolistic market is not so easy, requires huge amount of investment because of the nature of companies need high investment to start and high competition.
Causes of Oligopoly:
1. Economies of Scale: The firms in the industry, with heavy investment, using improved technology and reaping economies of scale in production, sales, promotion, etc, will compete and stay in the market.2. Barrier to Entry: In many industries, the new firms cannot enter the industry as the big firms have ownership of patents or control of essential raw material used in the production of an output. The heavy expenditure on advertising by the oligopolistic industries may also be a financial barrier for the new firms to enter the industry.
3. Merger: If the few firms in the industry smell the danger of entry of new firms, they then immediately merge and formulate a joint policy in the pricing and production of the products. The joint action of the few big firms discourages the entry of new firms into the industry.
4. Mutual Interdependence: As the number of firms is small in an oligopolistic industry, therefore, they keep a strict watch of the price charged by rival firms in the industry. The firm generally avoids price ware and try to create conditions of mutual interdependence.
Price determination under oligopoly
To understand this type of market situation, it needs to have an idea about the demand concept which is discussed in the above chapters.
Graphical analysis
In the oligopolistic market situation. At certain price P all the companies will be ready to sell its (cell services) products Q. When one company plans to increase its price to P1 to increase its returns (profits). So, We can observe that demand fall from Q to Q1. Showing the small raise in price from P to P1, causing more fall in demand. In other words, small raise in price caused more fall in demand. The reason is, when one company increase its product price in small amount to increase the profits, other companies don’t raise price and maintain same price. So the customers don’t buy the product which price is high, and all customers move to purchase other company products where there is low price.
If one company tries to increase small amount of demand from Q to Q2 compared with other companies. It should reduce more prices, from P to P2. The reason behind this situation is, when one company reduces small amount of price to increase its demand; other companies immediately do the same, so one cannot increase their demand. The only one option to the company is to reduce more prices from P to P2 which others companies can’t do the same, to increasing the small amount of demand from Q to Q2. It’s not so easy to reduce more prices which lead to great loss.
This situation is call price war situation. In this competitive situation every company needs to spend more on advertising cost to sell their products. Entry of new companies should face the severe competition from existing companies.
The above sited explanation can be practically applied to the cellular GSM service providing companies.
Price and Output Determination under Oligopoly:
(a) If an industry is composed of few firms each selling identical or homogenous products and having powerful influence on the total market, the price and output policy of each is likely to affect the other appreciably, therefore they will try to promote collusion.(b) In case there is product differentiation, an oligopolist can raise or lower his price without any fear of losing customers or of immediate reactions from his rivals. However, keen rivalry among them may create condition of monopolistic competition.
There is no single theory which satisfactorily explains the oligopoly behaviour regarding price and output in the market. There are set of theories like Cournot Duopoly Model, Bertrand Duopoly Model, the Chamberlin Model, the Kinked Demand Curve Model, the Centralised Cartel Model, Price Leadership Model, etc., which have been developed on particular set of assumptions about the reaction of other firms to the action of the firm under study.
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Monopsony
In economics, a monopsony (from Ancient Greek μόνος (monos) "single" + ὀψωνία (opsōnia) "purchase") is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only purchaser of a good or service, the "monopsonist" may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.The term was first introduced by Joan Robinson in her influential book, The Economics of Imperfect Competition. Robinson credits classics scholar Bertrand Hallward of Peterhouse College, Cambridge with coining the term.
The market condition that exists when there is one buyer and seller may be many. We can take example as ITC (Indian Tobacco Corporation) is only one buyer of Tobacco from various farmers (sellers)
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Oligopsony
An oligopsony is the opposite of an oligopoly.In an oligopoly a few large suppliers dominate a market, in an oligopsony a few large buyers dominate a market.
A good example are the many media sub-sectors where a few companies (the major media conglomerates) publish records, films and books, but there are many musicians, actors, writers etc. selling to these few companies. An oligopsony is a form of imperfect competition.
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Perfect Competition
The concept of perfect competition can serve as a useful benchmark against which to measure real life, imperfectly competitive markets. Perfect competition is a theoretical market structure. It is primarily used as a benchmark (good example) against which other market structures are compared. Industry that best reflects perfect competition in real life is in the agricultural industryv Perfect competition market does not exist practically.
v Its illusionary market by the economists.
Features of perfect competition market for its existence
By assuming the egg as the example product in this market. Read the following characteristics of this market. One can understand very easily1. There will be large number of sellers (producers) for one product. Eg: rarely can we see this market situation in the commodities like bananas and vegetables. Whereas this market situation is not seen in production side. Best example is egg
2. Large number of buyers in the market.
3. Existence of single price for a commodity in the entire market. All seller sell the product at the same price. There will not be different prices.
4. The commodity is homogeneous. Where the price, quality and quantity of products will be same. Buyer need not buy a commodity at a particular seller, because it will have same price, quantity and quality all over.
5. Buyers have perfect knowledge about price.
6. If any seller reduces the price, other seller remains silent until his production is over. Afterward again remaining seller sell at market price.
7. There is no need to seller to reduce the price of product, because there is no competition between the sellers.
8. There must be free entry and free exit in the market for the firms. New firms can join and old firms can leave the market.
9. There will be no selling cost. As the product is homogenous (same price, quality and quantity) there is no need for any publicity like advertisement.
10. There will be very less distribution cost, as sellers are in large number and every for the same product.
Definitions
— In the words of Leftwitch,' 'Perfect competition is a market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price."— In the words of Ferguson, "Perfect competition describes a market in which there is complete absence of direct competition among economic groups."
— In the words of Prof. Lim Chong Yah,' Perfect competition is a market situation where there is a large number of sellers and buyers, a homogeneous product, free entry of firms into the industry, perfect knowledge among buyers and sellers of existing market conditions and free mobility of factors of production among alternative uses."
