(i) A competitive market is a market in which there are many buyers and many sellers of an identical product so that each has a negligible impact on the market price.
(ii) Another type of market is a monopoly in which there is only one seller.
(iii) There are also other markets that fall between perfect competition and monopoly i.e. monopolistic competition.
Value: Analytic

(i) Perfect Knowledge means both buyers and sellers are fully informed about the market.
(ii) The firms have all the knowledge about the product market and the input markets. Buyers also have perfect knowledge about the product market.
(iii) Let us first take the product market. The implication of perfect knowledge about the product market is that any attempt by any firm to charge a price higher than the prevailing uniform price will fail. The buyers will not pay because they have perfect knowledge. A uniform price prevails in the market.
(iv) Regarding the knowledge about the input markets the implicit assumption is that each firm has an equal access to the technology and the inputs used in the technology.
(v) No firm has any cost advantage. Cost structure of each firm is the same.
(vi) Since there is uniform price and uniform cost in case of all firms, and since profit equals revenue less cost, all the firms earn uniform profits

The average revenue (AR) of a firm is defined as total revenue per unit of output sold. Let a firm's output be Q and the market price be P, then
TR equals P x Q. Hence,
AR = \(\frac { TR }{ Q } \)=\(\frac { P\times Q }{ Q } =P\)
In other words, for a price-taking firm, average revenue equals the market price.

(l) The price line shows the relationship between the market price and a competitive firm's output level.
(il) The vertical height of the price line is equal to the market price as shown in the given figure.

(i) Large number of buyers and sellers
(ii) Homogeneous product
(iii) Free entry and exit of firms
(iv) Perfect knowledge about the market
(v) Perfect mobility of factors of production
(vi) Absence of transportation and selling cost

(i) The supply curve of the firm tells us the quantity of the product that a firm is willing and able to produce and sell at each possible price.
(ii) The firm will produce and supply an output at the point at which Price is equal to Marginal cost. The derivation of the supply curve is explained with the help of the given figure.

(iii) The SMC of the firm is given. Let us initially assume that the market price is OP₁. The firm will produce and supply an output of OX₁ because at el' price = MC. (OX₁ is the equilibrium output supplied, as MC = MR and MC cuts MR from below).
(iv) Suppose the market price rises to OP₂, then the firm will produce and sell OX₂ level, because at e₂ level price = MC = MR.
(v) Similarly, as market price increases to OP₃, quantity supplied increases to OX₃ However, the firm will not supply any quantity if the price falls below OP.
(vi) At OP price, the firm will produce and sell OX output. For any price below OPthe firm will not produce and sell anything. The supply will be zero units. Having the above information, the supply schedule can be determined as,

(vii) If the market price falls below the minimum of the SAVC, the supply curve jumps to the small segment (OP) on the vertical axis at which there is zero supply. Therefore, two discontinuous [(OP) + (e'S)] pieces define the short run supply curve for the perfectly competitive firm.

(i) The supply curve of the firm tells us the quantity of the product that a firm is willing and able to produce and sell at each possible price.
(ii) The firm will produce and supply an output at the point at which Price is equal to Marginal cost. The derivation of the supply curve is explained with the help of the given figure.

(iii) The SMC of the firm is given. Let us initially assume that the market price is OP₁. The firm will produce and supply an output of OX₁ because at el' price = MC. (OX₁ is the equilibrium output supplied, as MC = MR and MC cuts MR from below).
(iv) Suppose the market price rises to OP₂, then the firm will produce and sell OX₂ level, because at e₂ level price = MC = MR.
(v) Similarly, as market price increases to OP₃, quantity supplied increases to OX₃ However, the firm will not supply any quantity if the price falls below OP.
(vi) At OP price, the firm will produce and sell OX output. For any price below OPthe firm will not produce and sell anything. The supply will be zero units. Having the above information, the supply schedule can be determined as,

(vii) If the market price falls below the minimum of the SAVC, the supply curve jumps to the small segment (OP) on the vertical axis at which there is zero supply. Therefore, two discontinuous [(OP) + (e'S)] pieces define the short run supply curve for the perfectly competitive firm.

(i) Buyers and sellers are free to enter or leave the market at any time they like. New firms induced by large profits can enter the industry whereas losses make inefficient firms to leave the industry.
(ii) The freedom of entry and exit of firms has an important implication. This ensures that no firm can earn above normal profit in the long run. Each firm earns just the normal profit, i.e., minimum necessary to carry on business.
(iii) Suppose the existing firms are earning above normal profits, i.e. positive economic profits. Attracted by the positive profits, the new firms enter the industry. The industry's output, i.e. market supply, goes up. The prices come down. New firms continue to enter and the prices continue to fall till economic profits are reduced to zero.
(iv) Now suppose the existing firms are incurring losses. The firms start leaving. The industry's output starts falling, prices going up, and all this continues till losses are wiped out. The remaining firms in the industry then once again earn just the normal profits.
(v) Only zero economic profit in the long run is the basic outcome of a perfectly competitive market.

Large number of sellers-
(i) The words 'large number' simply states that the number of sellers is large enough to render a single seller's share in total market supply of the product insignificant.
(ii) Insignificant share means that if only one individual firm reduces or raises its own supply, the prevailing market price remains unaffected.
(iii) The prevailing market price is the one which was set through the intersection of market demand and market supply forces, for which all the sellers and all the buyers together are responsible.
(iv) One single seller has no option but to sell what it produces at this market determined price. This position of an individual firm in the total market is referred to as price taker. This is a unique feature of a perfectly competitive market.
Large number of buyers-
(v) The words 'large number' simply states that the number of buyers is large enough, that an individual buyer's share in total market demand is insignificant, the buyers cannot influence the market price on his own by changing his demand.
(vi) This makes a single buyer also a price taker. To sum up, the feature "large number" indicates ineffectiveness of a single seller or a single buyer in influencing the prevailing market price on its own, rendering him simply a price taker.