Pricing under perfect competition.

Equilibrium of firm and industry :The following three conditions should be fulfilled for an industry to be equilibrium :

1. The quantity demanded and supplied of the commodity produced by the industry should be equal.Because,if demand and supply are not equal,three cannot be equilibrium price.For example, if supply is higher than supply,the price tends to rise and if supply is higher than demand,price tends to fail.
2. All firms must be in equilibrium.The firm will be in equilibrium when marginal revenue equals marginal cost and the MC curve cuts the MR curve from below.
3. There should be no tendency on firms to enter or leave the industry.The tendency does not exit when all the firms are earning only normal profit.The firm earn normal profit when average revenue equals average cots.The normal profit is just sufficient to retain the firms in industry.If the firms are earning abnormal profit ,there is tendency on new firms to enter the industry.On the other hand,if the firms are increasing losses,there is tendency on firms to leave the industry.The situation of earning normal profit is called full equilibrium.

Short-run equilibrium :
The three conditions necessary for industry equilibrium mentioned above are fulfilled in the long run.The third condition need not be fulfilled in the short run.Because,in the short run there in no possibility of new firm entering the industry and exiting firm leaving the industry.
There are two approaches to show equilibrium of a firm : total revenue - total cost approach and marginal revenue - marginal cost approach.

Total revenue - Total cost approach :
The aim of the firm is to maximise profit.So the firm will be in equilibrium when it maximises profit.Profit is the difference between TR from sales and total cost of operation.Profit is maximum for the rate of output that maximises the excess of revenue over cost.

conditions of perfect competition

The following conditions are to be fulfilled for a perfect competition market :

1. Small size,large number :These should exist large number of buyers and sellers in the market.They cannot exert influence on price.The consumer taken individually is unimportant.He cannot get special facilities from the sellers,such as credit,free service,discount etc.
2. Homogeneous product : All firms product homogeneous product.Their products are identical.The products are perfect substitutes of each other.The cross elasticity between the products of the firms is infinite.Since products are homogeneous ,a single firm cannot affect price.The buyers are also indifferent as to the firm they purchase.
3. Free mobility of resources :All resources are perfectly mobile.It implies that each resources can move in and out of market readily in response to reactionary signals.The implies that the required labour skills are few,simple and easily learned.Free mobility also means that the inputs are not monopolised by a producer or an owner.
4. Free entry and exit of firms :The new firms can enter and leave the industry without any difficulty.This condition is very difficult to realise in practice.The absence of barrier in entry and exit applies only in the long run.In the short run entry and exit is not possible.
5. Perfect knowledge :The consumers,producers and resources owners must have perfect knowledge,about the market.The consumers should know the market price.If not,they might buy at higher prices even when lower prices are available.There will then not be uniform price in the market.If they have perfect knowledge about the prevailing price,the not more than the prevailing price.

The producers need to know both costs as well price in order to produce the profitable rate of output.The sellers will not charge more than prevailing price.If they charge higher price,they Will have to loss the customers.Thus,due to the complete knowledge,a price prevails in the market.
Similarly,the resources owners should have perfect knowledge of the market.For example,if labourers do not know the wags rates offered,they may not sell their labour services to the highest bidders.
Besides these factors,ti is also assumed that is the absence of transport cost.The objectives of the firm is to maximise profit and that of consumer is to maximise utility.There are no government intervention in the form of tax or subsidy.
These requirements show that no market can be perfectly competitive.Even in agriculture market,the requirement of 'perfect knowledge' cannot be fulfilled due to vagaries of whether conditions.