Perfect Competition pp

Perfect Competition : 

Perfect Competition A.MEENAIAH LECTURER IN ECONOMICS N.G COLLEGE NALGONDA

Perfect Competition : 

Perfect Competition Features of Perfect Competition Large Number of Buyers and Sellers : Homogenous Product : Free Entry and Exit : Mobility of Factors of Productions : Perfect Knowledge : No Transport Costs : No Publicity Cost : Uniform Price :

Equilibrium of a firm under perfect competition : 

Equilibrium of a firm under perfect competition Marginal cost must be equal to marginal revenue. That is MC = MR. Marginal cost curve must cut the marginal revenue curve from below. Equilibrium N M R T MC P O X Y AR=MR OUTPUT COST-REVENUE

Perfect Competition Short run Equilibrium : 

Perfect Competition Short run Equilibrium In the short period, the firm attains equilibrium with abnormal profits or minimum losses and normal profits. The average cost of the firm less than the price, the firm earns abnormal profits. The average cost greater than average revenue the firm incurs losses. When AC equal to AR the firm, gets normal profits.

Firm with Supernormal Profits. : 

Firm with Supernormal Profits. AR>AC Profits “PETR” Part E M O X X Y AR=MR AC MC P T R OUTPUT COST’REVENUE

Firm with Losses : 

Firm with Losses AR<AC Losses “ PETN” Part O M P T N AR=MR E MC AC X Y OUTPUT COST’ REVENUE

Firm with normal profits : 

Firm with normal profits AR=AC E M O Y X P MC AC AR=MR OUTPUT COST’REVENUE

Long Equilibrium of a Firm : 

Long Equilibrium of a Firm AR=LAC E M O X LMC LAC AR=MR P Y OUTPUT COST D-REVENUE

Shut Down Point : 

Shut Down Point The question arises as to why at all the firms should continue producing the product if they are to make losses. In the short run if they cannot go out of the industry by disposing of the plant, why do they not at least close down, that is, stop producing, when they are making losses. This is because they cannot alter the fixed capital equipment in the short run and will therefore have to incur losses equal to the fixed costs even if they choose to shut down and stop producing the product. If the firm shuts down in the short run, it can avoid only variable costs, fixed costs have to be borne by it in the short run whether it is producing or not.

Slide 10: 

4. If the firm can earn revenue which covers variable costs as well as a part of the fixed costs, it will be quite rational for it to keep operating and go on producing the product since stopping production under such circumstances will mean greater losses. 5. The firm stops production in the short run, losses will be equal to the fixed cost. 6…As long as price exceeds average variable cost, the firm should continue operating in the short run.

Fig. Shut Down PointPoint “D” is the SDP : 

Fig. Shut Down PointPoint “D” is the SDP AVC SAC SMC P1 R O Q S T B A AR=MR=P P2 D U V AR=MR=P P3 L1 L2 L3 AR=MR=P OUTPUT PRICE AND COST Y X

BREAK EVEN POINT : 

BREAK EVEN POINT Break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain. At point “E” TR=TC OQ is the BEP production At OQ1 production TR>TC BEP=E TR TC E Q P Loss O Profit TFC Q1 N R S