Equilibrium in Perfect Competition Markets

 
Equilibrium of the firm under:
 
 
Perfect Competition
 
According to Boulding 
Perfectly
competitive market is a situation where
large number of buyers and sellers are
engaged in the purchase and sale of
identically similar commodities, who are in
close contact with one another and who
buy and sell freely among themselves.”
 
Characteristics of Perfect competition
 
1.
Large Number of Buyers and Sellers
2.
Existence of Homogeneous Product
3.
Free Entry and Exit of Firms
4.
Buyers and Sellers have full Knowledge of market
5.
Mobility of Factors of Production
6.
Non-Existence of Transport Costs
7.
Non-existence of Government Restrictions
8.
Non-existence of Price Control
 
Equilibrium of the firm
under perfect competition 
(Short run)
 
   The Equilibrium of the firm can be discussed in
terms of :
 
   
Total cost and Total Revenue 
(TC/TR)
 
   
Marginal Cost and Marginal Revenue 
(MC/MR)
 
Short-Run Cost curves
 
     
Total Cost  =   Total Fixed Cost  + Total Variable Cost
Total Fixed Cost (TFC) is graphically denoted by a straight line
parallel to X-axis showing output.
 
 
 
 
 
The Total Variable Cost Curve as shown in Figure has broadly
an inverse 'S' shape. This reflects the law of variable
proportions.
 
Total Fixed Cost Curve
 
Total variable cost curve
 
.
 
Total Cost Curve
 
TC, TVC and TFC
 
Equilibrium of a firm
under Perfect Competition through TC & TR
 
Total Cost Curve
 
Total Revenue Curve
 
Equilibrium of a firm
under Perfect Competition through TC & TR
 
Equilibrium of a firm under perfect competition
through MC & MR
 
To maximize profits, a firm should produce
and sell up to the point at which the 
MR=MC
Beyond the point of equality of marginal cost
and marginal revenue the firm will experience
losses
Thus, the main condition of firm's equilibrium
is that the firm should stop at the point of
equality of marginal cost and marginal
revenue
.
 
Equilibrium of a firm under perfect competition
through MC & MR
 
The marginal cost curve is given as
a dotted line.
 Point ‘A’ shows the equality of
marginal cost and marginal
revenue.
 ‘OQ’ is the maximum quantity
which the firm can produce as this
is the profit-maximising quantity.
Output beyond this, say at 8 units
or ‘OR’, which mean losses to the
firm, the marginal revenue for this
output is ‘RB’ but marginal cost is
higher at ‘RC’.
Therefore, if the firm produces
‘OR’, it will incur a loss indicated by
the triangle ‘ABC’
 
Output
 
Equilibrium of a firm under perfect competition
through MC & MR
 
The first and essential condition
of equilibrium of a firm is the
equality of MR and MC
.
It is necessary that beyond the
point of equilibrium, MC must be
higher than MR
If MC is lower than MR beyond
the point of equilibrium, the firm
will like to produce more so as to
secure profits
The MC curve should cut MR
curve from below 
as shown in
figure
 
Output
 
Equilibrium of a firm under perfect competition through MC & MR
 
The 
MC 
curve cuts the 
MR
 curve at two
places. At point 
‘A’ 
it cuts from above and at
point 
‘B’ 
from below.
Therefore, there are two points of equilibrium
‘A’ 
and 
‘B’
Before  point 
‘A’ 
MC is higher than MR which
means loss. So, point
 ‘A’ 
cannot be a
determinate equilibrium point
Beyond point ‘
A’ 
the MC is lower than MR  and
the firm can go on producing till it reaches
‘OR’ amount.
The determinate equilibrium point is,
therefore, 
‘OR’  
or
 ‘B’ 
for beyond that point
marginal cost is higher than marginal revenue.
We can conclude, therefore, that the equality
of MC and MR is not a sufficient condition of
firm's equilibrium and that 
it is necessary for
the MC curve to cut the MR curve from below
for
 
determinate equilibrium
 
Output
 
Different Cost Conditions: Equilibrium of the Firm
under perfect competition in short run
 
The short run equilibrium of firms when they are working
under different cost conditions
Difference in the quality of raw materials used by the
various firms,
 Differences in production techniques,
 Differences in efficiency of managers employed by them,
Differences in the size of plants built by them and
Differences in the ability of the entrepreneurs
themselves account for the differences in costs of the
various firms
 
For all the firms, Marginal Revenue (price) equals the
Marginal Cost at equilibrium output.
 
Firm ‘C’
 
Firm ‘B’
 
Firm ‘A’
 
In firm ‘A’ where,
  MR=MR
Production 100
 
In firm ‘B’ where,
  MR=MR
Production 500
 
In firm ‘C’ where,
  MR=MR
Production 1000
 
.
 
Firm ‘A’
 
Firm ‘B’
 
Firm ‘C’
 
Normal profit
 
MR=MC=AC
 
Supernormal
profit
AC is always less
than
MR & MC
 
Losses
AC is always
more than
MR & MC
 
Long Run Equilibrium under Perfect
Competition
 
-------
 
Short Run
 
Long Run
 
Price=
 
 The price and quantity combination corresponding to the equilibrium
point ‘P’ shows the actual magnitudes as determined by the market.
 No other combination of price and quantity of the commodity at
which the willingness or intentions of buyers and sellers will be
identical.
Slide Note
Embed
Share

Perfect competition in economics refers to a situation where numerous buyers and sellers are involved in trading identical goods freely, with full market knowledge and no government restrictions. Key characteristics include a large number of buyers and sellers, homogeneous products, free entry and exit of firms, and no price control. Equilibrium in the short run is analyzed based on total cost, total revenue, marginal cost, and marginal revenue. By achieving the point where marginal cost equals marginal revenue, firms can maximize profits in a perfect competition scenario.


Uploaded on Jul 22, 2024 | 2 Views


Download Presentation

Please find below an Image/Link to download the presentation.

The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.

E N D

Presentation Transcript


  1. Equilibrium of the firm under: Perfect Competition According competitive market is a situation where large number of buyers and sellers are engaged in the purchase and sale of identically similar commodities, who are in close contact with one another and who buy and sell freely among themselves. to Boulding Perfectly

  2. Characteristics of Perfect competition 1. Large Number of Buyers and Sellers 2. Existence of Homogeneous Product 3. Free Entry and Exit of Firms 4. Buyers and Sellers have full Knowledge of market 5. Mobility of Factors of Production 6. Non-Existence of Transport Costs 7. Non-existence of Government Restrictions 8. Non-existence of Price Control

  3. Equilibrium of the firm under perfect competition (Short run) The Equilibrium of the firm can be discussed in terms of : Total cost and Total Revenue (TC/TR) Marginal Cost and Marginal Revenue (MC/MR)

  4. Short-Run Cost curves Total Cost = Total Fixed Cost + Total Variable Cost Total Fixed Cost (TFC) is graphically denoted by a straight line parallel to X-axis showing output. Total Fixed Cost Curve Total variable cost curve The Total Variable Cost Curve as shown in Figure has broadly an inverse 'S' shape. This reflects the law of variable proportions.

  5. . TC, TVC and TFC Total Cost Curve

  6. Equilibrium of a firm under Perfect Competition through TC & TR

  7. Equilibrium of a firm under perfect competition through MC & MR To maximize profits, a firm should produce and sell up to the point at which the MR=MC Beyond the point of equality of marginal cost and marginal revenue the firm will experience losses Thus, the main condition of firm's equilibrium is that the firm should stop at the point of equality of marginal cost and marginal revenue.

  8. Equilibrium of a firm under perfect competition through MC & MR The marginal cost curve is given as a dotted line. Point A shows the equality of marginal cost revenue. OQ is the maximum quantity which the firm can produce as this is the profit-maximising quantity. Output beyond this, say at 8 units or OR , which mean losses to the firm, the marginal revenue for this output is RB but marginal cost is higher at RC . Therefore, if the firm produces OR , it will incur a loss indicated by the triangle ABC and marginal Output

  9. Equilibrium of a firm under perfect competition through MC & MR The first and essential condition of equilibrium of a firm is the equality of MR and MC. It is necessary that beyond the point of equilibrium, MC must be higher than MR If MC is lower than MR beyond the point of equilibrium, the firm will like to produce more so as to secure profits The MC curve should cut MR curve from below as shown in figure Output

  10. Equilibrium of a firm under perfect competition through MC & MR The MC curve cuts the MR curve at two places. At point A it cuts from above and at point B from below. Therefore, there are two points of equilibrium A and B Before point A MC is higher than MR which means loss. So, point A cannot be a determinate equilibrium point Beyond point A the MC is lower than MR and the firm can go on producing till it reaches OR amount. The determinate equilibrium therefore, OR or B for beyond that point marginal cost is higher than marginal revenue. We can conclude, therefore, that the equality of MC and MR is not a sufficient condition of firm's equilibrium and that it is necessary for the MC curve to cut the MR curve from below for determinate equilibrium point is, Output

  11. Different Cost Conditions: Equilibrium of the Firm under perfect competition in short run The short run equilibrium of firms when they are working under different cost conditions Difference in the quality of raw materials used by the various firms, Differences in production techniques, Differences in efficiency of managers employed by them, Differences in the size of plants built by them and Differences in the ability of the entrepreneurs themselves account for the differences in costs of the various firms

  12. For all the firms, Marginal Revenue (price) equals the Marginal Cost at equilibrium output. Firm B Firm A Firm C In firm A where, MR=MR Production 100 In firm B where, MR=MR Production 500 In firm C where, MR=MR Production 1000

  13. . Firm C Firm A Firm B Normal profit Supernormal profit AC is always less than MR & MC Losses AC is always more than MR & MC MR=MC=AC

  14. Long Run Equilibrium under Perfect Competition Short Run Long Run ------- Price= The price and quantity combination corresponding to the equilibrium point P shows the actual magnitudes as determined by the market. No other combination of price and quantity of the commodity at which the willingness or intentions of buyers and sellers will be identical.

More Related Content

giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#