ir)

OUESTION \,/

perfect competition. Explain equilibrium of a firm under perfect

competition in short and lorig run.22-.
ANSWER
cuon
quilibrium means a situation in which tlvo opposite forces are exactly
The basic aim of the firm is to get maximum proflt. Firm will expand its
when higher profits are expected. "i

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

and

2) Normal

rs and no one can gffect market activities.

Firm

itions of Perfect ComPetition

equal,

Perfett compelition takes place under the following conditionsl

rge number of buyers and sellers
Under perfect competition there are large number of buyers and sellers
no one can e:fect market Price.
ornogeneous product
In perfectly competitive market all units of a good are homoqeneous.and

This

Diagram

ntical, r))t/

rfect knowledge

'

All b,J1,s;5 and sellers must have conlpiete and perfect knowledge about
activities.

t"

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

the other place or from one flrm to the other firm.

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

ree entry and

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

ExPlanati
The

OP i5 the (
Her

, t.-

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

ihrket.
',,

price
Single pnce
)tn9te

Under perfect comPetition single price prevails in the whole market which
rmined by the forces of demand and supply.

uilibrium of a Firm

Firm's equilibrium means the detelmination oF output where proflts are

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
I. Necessary conditioo

tI. sufficient

a flrm:

.FlC.= t'lR

condition
lrlc curve musl cul

'

., '

...:

ivlR

curve lrom

belo!,

3) Nqrm
Fir

TI
Diagran

Perfect ComPetition

ration

Theifirm
the-firm is in equilibrium at point "E". OQ is the equilibriurn quanuty while
dquilibrium price.
he eiquilibrium
the
Price.
:
Here

'

"\

ag = A.ri

'o'n

oQ
'ic=(ai)(outpu0
TC = (AB) (oQ)
TC=oQAB
-

= El

ouiPur=o-Q

ourpur =

.^

(EP) (output)
TR= (EP) (oQ)
TR = OQEP

TR

PIofit-N=TR,TC
N=OQEP-OQAB
tl = EPAB

'mal Drofit
t*ir'i

profils when total revenues.and toLal costs are

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

iiii,

"urn' "orral
rhis can be explained *ith

LJ-n'il)

il;;"i;

l'fE:d;;':

,v'c
aaC

ie"'

L6k+

Qa'rer,ttL's P

The Rrm is in equilibrium ar polnL

the equilibrium Price.
Here
AC=EP
Ouipul = OQ
i-.r -Tc = t.qC; (OutPuo

'"''

rc

OQ is

p) ,oQ.r
= (e

TC = OOEP

Gkl

"t".

Rdotu\u

the equilibrium quantity while

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

TR=TC=OQEP

q
I-OSE
?

'

(X-a-is

)
L

sMC

GtF

&

D/

l=c,\e
/
.7'
Reyetu,tL, ? l--1AS---,^:'''-"' ' | -iF=;r=;.-r--

Explan,
T
OP is th,

P.c>wt<

4K:MA

i,ti, ; ll

'r\ Yf

In 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 point
Because 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
,ii q,! ryu,',u,,uIr LU
conditions.
urLrulls. rrrm
Firm ts
is jn
ln
equiribrium
equ
tDnum
,irr"ii",
situalion
at
noini,,F,
p"iri "r"
l:,11_,n::o::,:orlrl
Mc-and t4R are equal and slope oF MC is grealer Lhan SrrJ;i-taR
"t
re uP will be the equilibrium price and

:'a)

sh*r

is the equilibrium quantity.

OQa

rirn possibitities
Short run
"short run ir{time period in
which a firm can only change
. its variable factors of
. production.',

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

run;

in

Abnormal profit

Norrial profit
Normal loss
Shutdown point

I prdfit / Supernormal profit

Firm will earn abnormal or supernormal proflts when total revenues are
: than total
(TR > TC)
This can be explained with then help of.diagram.

costs.

loss o;
ns th

(y-q-ir,

musl
,,5

SAC

JAr(
?

3 ?s9F_[

AfuF4(

(x

-o*; 5 7

u1
I

PerFect Competition

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

,j

is the equilibrium price.

Here-

,
l.

'

AC ='fG
Outpui - OQ
TC = (AC)
TC = (TC)
:tlC =

AR=EP
Ourplr = OQ
TR = (EP) (Outpu0
TR = (EP) (OQ)
TR = OQEP

(Outpuo .
(OQ)
OQTG
.
Profir =n-TR-TC

= oQEP

LOSS = TCEP

OQTG

JAC

JAva

k?r
x.

Rc!ennt)

(x-a'^41r
old
ot\,
p*,r
anation
nauon
Po,r
The firm is in equilibrium at point "E". OQ is tlre equilibrium quantity while
is the equilibrium price.
Here

'

AR=EP

AC = Ctl

OutPUt = OQ

Ootput
TR
TR
TR

TC = (AC) (Ourput)
TC = (GH) (OQ)
TC = OQGH

Prolir=|l=TR-TC.

=
=
=
=

OQ
(EP) (Output)
(EP) (OQ)
OQEP

= oQEP - OQGH
- 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, the
must close down. Therefore it is better to shutdown and wait for some qood"4LOSS

.'-l

,i

i
l

,,l

i'f
'I

"; '
,i

)r

-Ih

rurR
"Long run is a tirne period in
which a firh can chanEe iG
Fi'-: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 under
competition a firm will earn only normal profit. This can be explained with
help of following diagram.

orarn

LM.

(Y-1i^j!,

't,,l+

.+

P/

A<'= t4Q-l

A(. m(

QeventJo

Ae'= v1ft"

cost and
eS are taken on y.axis. At point "E" firm faces the equilibrium situation
necessary and sufficient conditions are satisfied.
.
i. LlvlC = MR
LMC is cutting MR from below
point 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 point
lfirm is facing losses. Due to loss some firms exit from industry. As a reslrlt
icd level increases and AR curve shifts upward from.AR" to AR.

ii.

re

AR=EP

LAC = EP
OutPUr = OQ

'

Outp,,rt = OQ

TC = (LAC) (Ourpu0
TC = (EP) (OQ)
TC = OQEP

TR = (EP) (O0rpur
TR = (EP) (OQ)
TR = OQEP

TR=TC=OQEP.

]],lJ::lii.-.-.

,.
+'u

Ll

{J;\

,,:Li/

.1; Lr.6g;)

r(:.

'(:

:'- t^L
::

-i

r_.

r:

el

))

d.'d,

Monopoly

,,/

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

4!

long

ANSWER.

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
productjon
n-opoty ate control over certain raw material, kriowledge of '
nniquls; riqnts of production process or goYernment licensing etc .
ractelistics of .monoPolY

gle seller
1) single

single seller controls the whole market. ThF Single seller may De an
trairiaii gi"rp ;puti""", -tpotuti""t or the sta6'

close substitute
2) No
' -rn"i"

it

rr

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

similar good.

3) Barriers for new firms

I\4onopoly can exist only when Lhere are

.]ew lirns
sl'ong ba(riers fo.

4)

Less elastic demand

Unde. monopoly the respcnse of demand due
very' low.

to

change in price is

5) Control over Price

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

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

rev(

Necessary condition
PIC

II.

EXI

MR

Sufficientcondition
NlC

curve must cut MR curve from below

iagram (y-a i)
5ML

2)l

Lq,+

equ

?.

Reteqle!

Explanation

A<
-q--.1111-ote,rr

Dia

rx-q"-isr

while price',cost
the above diagram output is measured along x-axis
where both
g. l-"u"nr", ui" taken on y:axis. Equilibrium takes place at point "E"
equil'br;um
i"
the
OQ
There o e
i"."rru* unO sLificient co'rdr.ions are fulnlled
pr'ce'
quanf'fy w\ile OP wil' corsider as equ l'oridm

ir

/)-l

cB
sho!-t run
,'Short

run id fime perrod

IVlonopoly

in

which a firm can only change

its
urd,i,

ll

T.":^T:ly

,n"l-"

variable iactors ot

or equiribrium ora firm in short,un:

"f!"fl"ltJ"i;r,bitiries
pro'r

i:T'ii;fl,iupernormal

3)

Normal loss
revenueS

?
s

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

-D
EXptanattori

dp"g.

(x-qx;s,

In the above diaqram output is measured

along x-axis whjle cost &
rqvenues are taken on y-axis.
Here
AC=RS

AR=TP

Outpur = OQ

._

Outpur = OQi. \
TR = (Tpj (Ourpur)

rC = (AC) (ourput)

rc

= (RS) (OQ)
TC = OeRS

Profir=I1=TR-TC

TR = (rP) (oQ)
TR = OQTP

4. T=oQTP_oQRs

' II = TPRS
Normal piofit
Fi.m will earn normal profits when total
revenues and totai costs are
,"o'. _, .
(TR = TC)
,_, lh,r.un be explained Lrith lhen hetp ol o;dgrd-n.
Diagram
'
I

Y-o!i!/

C6rf

t-

Q..,^oo

(x-q.ar r

[lonoP6lY

nauon
The firm is in

equiLlbriurn

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

is the equilib-rium priee.

Here

AR=TP

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

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

(Y-q s,
Unc
exp

cq,l

.!,

P-cren ,s.l

nu+oui'

anation
The firm is in equilibrium at point "E". oQ is the equilibrium quantity while
is the equilibrium Price.

Here-

AR=TP

AC=GH

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

Outpur

Output = OQ

TC = (AC) (Output)
rc = (cE) (oQ)
TC = OQGH

Profit=n=TR-TC
= OQTP - OQCFI
I-oSS = GHTP

r::t---:(

,Ls

I
I

l'4onopoly

Long rum equ.rilibiiuurn of a finml

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."

Equi[it

cohdltjo.frs

ri lrrn

Nerceosarf coll'( ftloa

'

i.

LMC

ii.

LltC is cutting lvlR from below

l4R

slfficimt condition

'

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

!fx-c\,i1,)
Explanation

ql1ipulr

Here

AR = 'l-P

46=RS

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

Output = OQ

TC = (AC) (Oulpuo
TC = (RS) (OQ)
TC = OQRS

Profit=

= TR-TC

N = OQTP._ OQRS

= rpRS_)