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Micro-Economics
Price and Output Determination
(equilibrium - Under Different Markets
Dr. S S Deshpande (PhD Economics, EPBM: IIM-C)
Associate Professor New L.J. Commerce College
Ahmedabad [email protected]
Meaning of firm’s equilibrium
1. MR= MC*
2. MC curve must be rising.
(MC curve must intersect MR curve from below)
Firm’s Equilibrium
3
MR
MC
E
Q
MR $ MC
10
Equilibrium of a firm
Eqm of a firm
PC MC Monopoly
SR LR SR LR SR LR 1.Abnormal profit Only 1.Abnormal profit Only 1. Abnormal profit 1. Abnormal profit
2. Loss Normal 2. Loss Normal 2. Loss 2. normal profit
3. Normal profit Profit 3. Normal Profit Profit 3. Normal profit
Explanation
• All the three possibilities of supernormal profit, loss and normal profit exist in short run in all the markets as the firms cant enter or exit the market.
• In the long run firms can make only normal profit due to the freedom of entry and exit. Only under monopoly firm makes super-normal profit in the long run due to barriers to entry.
Abnormal profit
AC
MC
AR=MR
Cost & Revenue
Output
E P
C
C1
Abnormal Profit
LOSS
•
MC COST AND AC REVENUE LOSS AR=MR
O
E
C1
P
C
NORMAL PROFIT
• MC COST
AND AC
REVENUE
• P E AR=MR
•
• O Q Q
LR equilibrium of a firm under P.C.
NORMAL PROFIT
• MC COST
AND AC
REVENUE
AR=MR
E
O Q
S R Eqm of a firm under MC
ABNORMAL PROFIT • MC AC COST
R1 R C1 C REVENUE • E • AR
• O Q MR Q
Abnormal Profit
LOSS
• MC AC C1 C
R1 LOSS R
E AR
• O Q MR Q
NORMAL PROFIT
• MC AC COST AND
REVENUE P • E AR
•
• • O Q MR Q
LR equilibrium of a firm under M.C.
NORMAL PROFIT
• MC AC COST AND
REVENUE •
• AR
• O Q MR Q
S R Eqm of a firm under Monopoly
ABNORMAL PROFIT • MC AC COST
AND R1 R C1 C REVENUE • E • AR
• O Q MR Q
Abnormal Profit
LOSS • MC AC COST C1 C
AND LOSS
R1 R
REVENUE
•
E
• AR
•
• O Q MR Q
NORMAL • MC COST
AND C=R AC P REVENUE • E • AR
• O Q MR
LR equilibrium of a firm under Monopoly
ABNORMAL PROFIT • MC AC COST
AND R1 R C1 C REVENUE • E • AR Q MR