PERFECTLY COMPETITIVE MARKET PRESENTATION FOR ECONOMICS HONOURS SEMESTER
PERFECTLY COMPETITIVE MARKET PRESENTATION FOR ECONOMICS HONOURS SEMESTER II MARKETS AND ITS FORMS The four distinct market models are; Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly PERFECT COMPETITION - CHARACTERISTICS Large number of Buyers and Sellers Standardized/Homogeneous Product
Price Takers Free Entry and Exit Perfect knowledge about the market condition EQUILIBRIUM OF A PRICE TAKER FIRM IN SHORT RUN In short run the number of firms is fixed in the industry and firms can only change its output level by changing the variable cost. A Firms equilibrium point can be ascertained by the following
two ways. Total Revenue & Total Cost Approach Marginal Revenue & Marginal Cost Approach EQUILIBRIUM OF A PRICE TAKER FIRM IN SHORT RUN TR & TC APPROACH A firm is in equilibrium and earns maximum profit when the difference between TR and TC is highest.
At any point, where TR touches TC curve, it will be a Break-even point and here firm will earn Normal Profit. Normal profit does not mean Economic profit. PERFECT COMPETITION: PRICE & REVENUE No: Output Price Total
Revenue Average Revenue Marginal Revenue 1 10 10 10
_ 2 10 20 10 10 3
10 30 10 10 4 10 40 10
10 Hence, under perfect competition, Price=AR=MR THE COMPETITIVE FIRMS DEMAND CURVE Price Pm MR = AR = P Quantity
THE OPTIMAL LEVEL OF OUTPUT FOR A COMPETITIVE FIRM IS DETERMINED WHERE MARGINAL REVENUE (MR) IS EQUAL TO MARGINAL COST (MC) OPTIM Rs P* AL OUTPU T LEVEL
MR = Demand or AR Quantity OPTIMAL OUTPUT LEVEL Rs P* MC MR = D=AR Quantity
OPTIMAL OUTPUT LEVEL MC Rs P* MR = D=AR Q* Quantity AVERAGE TOTAL COST Average Total Cost (ATC) can be added to the graph
to demonstrate the firms profit potential. The per unit cost of producing a specific good. The difference between ATC and products price equals the profit per unit of product. EQUILIBRIUM OF A PRICE TAKER FIRM IN SHORT RUN MR & MC APPROACH
MR & MC approach states that a price taker firm is in equilibrium at a point where MR or Price = MC. The firms equilibrium point does not ensure that it is producing that level of output which gives firm maximum profit. In short run, a firm is faced with four types of product prices in the market which give rise to following results; A firm
earns Supernormal Profit A firm earns Normal Profit A firm incurs Losses but does not Close Down A firm minimizes Losses by Shutting Down Price MC ATC P* MR = D AR = P
Quantity MC Rs ATC P* MR = AR = P Q* Quantity
MC Rs ATC P* Profit MR = D= AR = P Q* Quantity
SUPERNORMAL PROFIT Price Note: - ATC = Profit per unit of output Price < ATC indicates a loss It is important to note that profit in a perfectly competitive market will lead to firms wanting to enter that market If
enough firms enter, then the market supply curve will shift to the right. Price S Pe D Qe Quantity Price S
S` Pe D Qe Quantity PROFIT With the increase in Supply, price will be driven down. With the lower price, profits will be driven out.
Loss MC Price ATC P* Loss MR = D AR= P Q*
Quantity Price S Pe D Qe Quantity Price S S
Pe D Qe Quantity Normal profit MC Price ATC MR = D AR= P
P* Q* Quantity SUMMARISE Firm is in equilibrium when MC =MR Firm maximizes the profit when the
price exceeds the AC. In the short run firms earn either supernormal profits(when AR exceeds AC),losses(when AC exceeds the AR)or will be forced to shut down(when AR falls short of AVC) LONG RUN EQUILIBRIUM Long run shows the entry and exit of the firms into the industry. If firms make supernormal
profits in the SR, new firms will enter the industry till the excess profits get wiped out. Similarly, If firms are making losses, existing firms will quit the industry so that the remaining ones will be able to make at least normal profits. Thus, under long run, firm and industry under perfectly competitive market will earn only normal profits.
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