Demand Analysis in Perfect Competition

Perfect competition is characterized by:

1 There are a large number of potential buyers and sellers.

2 The products offered by the sellers are virtually identical.

3 There are few or easily surmountable barriers to entry and exit.

4 Sellers have no market-pricing power.

5 Non-price competition is absent.

Price elasticity of demand

εP = –(% change in QD) ÷ (% change in P)

εP > 1 Demand is elastic

εP = 1 Demand is unitary elastic

εP < 1 Demand is inelastic

εP = ∞ perfect price elasticity

εP = 0 perfect price inelasticity

Consumer income and the price of a related product influence shifts in consumer demand.

Income elasticity of demand

εY = (% change in QD) ÷ (% change in Y)

For normal goods, εY > 0

For inferior goods, εY < 0

Cross-price elasticity of demand

εX = (% change in QDA) ÷ (% change in PB)

εX > 0, the two products are substitutes.

εX < 0, the two products are compliments.