CBSE Class 12 Economics: NCERT Solutions for Perfect Competition

Solution: A perfectly competitive market is defined by several key characteristics that ensure no single buyer or seller can influence the market price. These include:

1. Large number of buyers and sellers: There are so many participants that each individual buyer or seller is insignificant in the market, unable to affect the price.
2. Homogeneous product: All firms sell identical products, meaning consumers perceive no difference between the goods offered by different sellers.
3. Free entry and exit of firms: New firms can easily enter the market, and existing firms can leave without facing significant barriers or costs.
4. Perfect knowledge about the market: Both buyers and sellers have complete and instantaneous information about prices, quality, and other relevant market conditions.
5. Perfect mobility of factors of production: Resources like labor and capital can move freely between different industries or firms in response to changing economic opportunities.
6. Absence of transportation and selling cost: It is assumed that there are no costs associated with transporting goods to market or with advertising and selling efforts.

Solution: The price line, also known as the demand curve for an individual firm in perfect competition, illustrates the relationship between the market price and the quantity of output a competitive firm can sell.

For a perfectly competitive firm, which is a price taker, the market price is fixed. Therefore, the price line is a horizontal line drawn at the level of the market price. This means that the firm can sell any amount of its product at this given market price. The vertical height of this line is precisely equal to the market price (P). This also signifies that the Average Revenue (AR) and Marginal Revenue (MR) are equal to the market price.

The figure typically shows that the price line is represented by the equation $AR\; =\; MR\; =\; P$, and it is upward sloping only for the industry's demand curve, not for the individual firm.

Solution: For a firm operating in a perfectly competitive market, it is considered a 'price taker'. This means the firm has no influence over the market price and must accept the price determined by the forces of market supply and demand.

Average Revenue (AR) is defined as the total revenue earned per unit of output sold. If a firm sells Q units of output at a market price of P, then the Total Revenue (TR) is calculated as TR = P \times Q.

Therefore, the Average Revenue (AR) is calculated as:

AR = \frac{TR}{Q} = \frac{P \times Q}{Q} = P

This shows that the average revenue (AR) of a price-taking firm is always equal to the market price (P). This relationship is fundamental to understanding firm behavior in perfect competition.