ir)OUESTION \,/

perfect competition. Explain equilibrium of a firm under perfect

competition in short and lorig run.22-.ANSWER

cuonquilibrium means a situation in which tlvo

' All b,J1,s;5 and sellers

The basic aim of the firm is to get maximum

Competition

rs and no one can gffect market activities.itions of Perfect ComPetitionPerfett compelition takes place under the following

no one can e:fect market Price.ornogeneous product

rfect knowledge

when higher profits are expected. "i

opposite forcesproflt. Firm will

are exactlyexpand its

The mirket structure in which there are targe number oi buyers and

conditionsl

and sellers

2) NormalFirm

equal,This t

Diagram

ExPlanatiThe

OP i5 the (Her

, t.--T,)l,,Li' 1c,

3) NqrmFir

TIDiagran

rge number of buyers and sellersUnder perfect competition there are large number of buyers

In perfectly competitive market all units of a good are

ntical, r))t/homoqeneous.and

must have conlpiete and perfect knowledge about

price prevails in the whole market which

and supply.

rfect mobilityt" Und", perfecl competition factors of production can move from one place

the other place or from one flrm to the other firm.ree entry and exit

ln casdlerfect competition new flrms can enter into the industry and the

sling flrms can leave the industry. This condition is applicable in long run'

small share of sales: Due to large number of sellers, each firm has a small share of sales in the

activities.

ihrket.

', Single price, )tn9te pnceUnder perfect comPetition singlermined by the forces of demand

uilibrium of a FirmFirm's equilibrium means the detelmination oF output where

mized. lf the firm has to iace losses, they must be minimized'

nditions of equilibrium of a firm. There are tlvo conditions of equilibrium of a flrm:

I. Necessary conditioo

.FlC.= t'lRtI. sufficient condition

lrlc curve musl cul ivlR curve lrom belo!,

' ., ' . ...:

proflts are

7

Perfect ComPetition

rationthe-firm is in equilibrium at point "E". OQ is the equilibriurn quanuty while

he dquilibrium price. : "\

Here

Theifirm is in equilibrium at point "E".the eiquilibrium Price.

' ag = A.ri 'o'n = Elourpur = oQ ouiPur=o-Q .^ ,'ic=(ai)(outpu0 TR - (EP) (output)

TC = (AB) (oQ) TR= (EP) (oQ)

TC=oQAB TR = OQEP- PIofit-N=TR,TCN=OQEP-OQABtl = EPAB

'mal Drofitiiii,

t*ir'i

"urn "orral profils when total revenues.and toLal costs are

' (TR =TC) P lil: i in( '1

rhis can be explained *ith il;;"i; l'fE:d;;':LJ-n'il) ,v'c

:

aaCie"'L6k+

cQa'rer,ttL's P

The Rrm is in equilibriumthe equilibrium Price.

ar polnL "t". OQ is the equilibrium quantity while

AR=EPOutpuL= OQ

TR = (EP) (Output)

TR = (EP) (OQ)TR = OQEP

HereAC=EP

Ouipul = OQi-.r -Tc = t.qC; (OutPuo'"'' rc = (e p) ,oQ.r

TC = OOEP. TR=TC=OQEP

Gkl+

Rdotu\u

I-OSEq

?

' (X-a-is )

L

sMC

GtF I D/& l=c,\e / P.c>wt<

Reyetu,tL, ? l--1AS---,- .7'^:'''-"' ' | -iF=;r=;.-r-- 4K:MA

i ; ll,ti,

proflts when total revenues are

Explan,T

OP is th,H

:'a) sh*r

loss o;ns th

musl r

'r\ YfIn the above diagram level of oulpuL is measured along \_axis whjle cosl

revenues are taken on y-axis. Firm js not in equilibrium situation at pointBecause at Lhis point necessary condilion is fulfliled but ,rff"i"ri .onjiton)t valid. Points 'fi",'and 'D,, are also not equitibrium points Oecauie ifref Oo

l:,11_,n::o::,:orlrl conditions. Firm is jn equiribrium ,irr"ii", "t

p"iri "r",ii q,! ryu,',u,,uIr LU urLrulls. rrrm ts ln equ tDnum situalion at noini,,F,Mc-and t4R are equal and slope oF MC is grealer Lhan SrrJ;i-taRre uP will be the equilibrium price and OQa is the equilibrium quantity.

Short run"short run ir{time period inwhich a firm can only change

. its variable factors of. production.',

r perfect competiflon ther-e are fuqr.possibilities of equilibrium of a firrn inrun;

rirn possibitities

Abnormal profitNorrial profitNormal lossShutdown point

I prdfit / Supernormal profitFirm will earn abnormal or supernormal

(y-q-ir,

: than total costs. (TR > TC)This can be explained with then help of.diagram.

,,5 hSACJAr(

?3

AfuF4(?s9F_[

(x -o*; 5 7

Ianation

u1I,j

i

,

fhe nim is ln equilibrium at point "E". Oe is the equilibrium quaniity wn e

PerFect Competition

l. Outpui - OQ

is the equilibrium price.Here-, AC ='fG

is the equilibrium price.Here

AC = Ctl' OutPUt = OQ. TC = (AC) (Ourput)

TC = (GH) (OQ)TC = OQGH

AR=EPOurplr = OQ

AR=EPOotput = OQ

TR = (EP) (Output)TR = (EP) (OQ)TR = OQEP

' TC = (AC) (Outpuo . TR = (EP) (Outpu0TC = (TC) (OQ) TR = (EP) (OQ)

. :tlC = OQTG TR = OQEP. Profir =n-TR-TC

= oQEP - OQTGLOSS = TCEP

( JACJAva

k?rx.

Rc!ennt)

anation(x-a'^41r

nauon ot\, Po,rThe firm is in equilibrium at point "E". OQ is tlre equilibrium quantity while

old p*,r

Prolir=|l=TR-TC.= oQEP - OQGH

LOSS - CHEP)loss of the firm is GHPE. The fitm is on shutdown point, The amount of loss

s the same, weather it operates or not. However, if price further ialls, thesome qood"4-

5

must close down. Therefore it is better to shutdown and wait for

.'-l ,i il

,,l

i'f "; ' )r

'I,i

-Ih

T

rurR

"Long run is a tirne period inwhich a firh can chanEe iGFi'-:df,.l Faetols as well as

shifu downward, supernormal profit converts into normal profit. In case, scime of the existing firms leave the industry, AR curves shifts upward.

s situation losses will convert into hormal profit. It concludes that undercompetition a firm will earn only normal profit. This can be explained with

help of following diagram.orarn (Y-1i^j!, LM.

't,,l+ P/

.+ ?QeventJo u

P

re LAC = EPOutPUr = OQ

. TC = (LAC) (Ourpu0TC = (EP) (OQ)' TC = OQEP

TR=TC=OQEP.

eS are taken on y.axis. At point "E" firm faces the equilibriumnecessary and sufficient conditions are satisfied.. i. LlvlC = MR

ii. LMC is cutting MR from belowpoint E'firm is eaming supernolmal proflt. Ndw firms enter into the industry,ce falls from P'to P and AR curves shifts downward from AR'to AR. At pointlfirm is facing losses. Due to loss some firms exit from industry. As a reslrlticd level increases and AR curve shifts upward from.AR" to AR.

A<'= t4Q-l

t^L-i

A(. m(Ae'= v1ft"

AR=EPOutp,,rt = OQ

TR = (EP) (O0rpur )

TR = (EP) (OQ)TR = OQEP

cost andsituation

+'u a.1; Lr.6g;)

r(:. ' :'-(: ::

]],lJ::lii.-.-. i {J;\

,. Ll ,,:Li/

. r_. r: el d.'d,

))

,,/ lFYULJ. "ne monopoly. Explain equitibrium of a lirm under monopoly in

ANSWER.

Monopoly

short 4! long

opoly'Monopoly is a mdrkeL structure in which there is a sing'e seller, Lhere is no

substiiute and there a?e fariiLrs to entry for new frrms Main causes of

n-opoty ate control over certain raw material, kriowledge of productjon

nniquls; riqnts of production process or goYernment licensing etc . '

ractelistics of .monoPolYgle selleri single seller controls the whole market. ThF Single seller may De an

1) single seller

trairiaii gi"rp ;puti""", -tpotuti""t or the sta6'2) No close substitute r r- ' -rn"i"

it no ctose suBsfitit". No other firm.is producihg or sellinq the

similar good.

3) Barriers for new firmsI\4onopoly can exist only when Lhere are sl'ong ba(riers fo. .]ew lirns

4) Less elastic demandUnde. monopoly the respcnse

very' low.5) Control over Price

of demand due to change in price is

A monopolist has a considerable control over Price of the commodity'

uilibriLrm of a firrri under monopolyThere are two conditions of equilibrium oF a firm'

L Necessary condition

PIC - MR

II. Sufficientcondition

NlC curve must cut MR curve from below

iagram (y-a i)5ML

Lq,+?.

Reteqle!

EXI

rev(

A<

2)l

equ

Dia

--.1111- - - rx-q"-isrq ote,rrExplanation

ir the above diagram output is measured along x-axis while price',cost

g. l-"u"nr", ui" taken on y:axis. Equilibrium takes place at point "E" where both

i"."rru* unO sLificient co'rdr.ions are fulnlled There o e OQ i" the equil'br;um

quanf'fy w\ile OP wil' corsider as equ l'oridm pr'ce'

cB /)-lIVlonopoly

\sho!-t run

,'Short run id fime perrod inwhich a firm can only changeits variable iactors ot

urd,i, T.":^T:ly

,n"l-" "f!"fl"ltJ"i;r,bitiries or equiribrium ora firm in short,un:

ll i:T'ii;fl,iupernormal pro'r

3) Normal loss

'l<e.{e}u^e,3

-DEXptanattoriIn the above diaqram

rqvenues are taken on y-axis.Here

AC=RSOutpur = OQ

rC = (AC) (ourput)._ rc = (RS) (OQ): TC = OeRS

revenueS

(x-qx;s,

along x-axis whjle cost &

?s

qoutput is

dp"g.measured

Normal piofitFi.m will earn normal

Diagram

4. T=oQTP_oQRs' II = TPRS

profits when total revenues,"o'. _, . (TR = TC)

,_, lh,r.un be explained Lrith lhen hetp ol o;dgrd-n.

Profir=I1=TR-TC

AR=TPOutpur = OQi. \

TR = (Tpj (Ourpur)TR = (rP) (oQ)TR = OQTP

and totai costs are

' I Y-o!i!/

C6rft-

Q..,^oo ?

(x-q.ar r 1

inauonThe firm is in equiLlbriurn

is the equilib-rium priee.

HereAC=TP

Oulput = OQCp,TC = (AC) (Ourput)TC = (TP) (OQ)TC = OQTP

is the equilibrium Price.Here-

AC=GHOutput = OQ. TC = (AC) (Output)

rc = (cE) (oQ)TC = OQGH

Profit=n=TR-TC= OQTP - OQCFI

I-oSS = GHTP

[lonoP6lY

at point "E". oQ is Lhe equilibrium Auantity U/hile

AR=TPOutput = OQ

TR = (AR) (Outpr.rt)

TR = (TP) (OQ)TR = OQTP

TR=TC=OQTP

Firm will face loss when total revenues are less than total costs' (TR <Te)

Th:s can be exp'ained witn then help of diagcam

(Y-q s,

cq,l.!,P-cren ,s.l

nu+oui'anationThe firm is in equilibrium at point "E". oQ is the equilibrium quantity while

AR=TPOutpur - OQ

TR = (TP) (Output)TR = (TP) (OQ)TR = OQTP

Uncexp

Long rum equ.rilibiiuurn of a finml

!fx-c\,i1,)ql1ipulr

l'4onopoly

r::t---:(

,Ls I

I

t

lrng run

:, "Long run is a time Period in, which a firrh can change its. ,, fited factors as well as: vqYi.$te factors of production."

P

s

Equi[it ri lrrn cohdltjo.frs

Nerceosarf coll'( ftloa' i. LMC = l4Rslfficimt condition

' ii. LltC is cutting lvlR from below

urrder monoJoly a firm will earn supernotmal prolll in long run. This cdn be

explained with the help of di"grdm.

Piagrar-n

Cu*&

(Qeve ru,terr

Explanation

Here46=RS

Output = OQTC = (AC) (OulpuoTC = (RS) (OQ)TC = OQRS

Profit= = TR-TC

AR = 'l-P

Output = OQTR = (TP) (Output)TR = (TP) (OQ)TR = OQTP

N = OQTP._ OQRSn = rpRS_) +