PERFECT COMPETITION: PRICE AND OUTPUT DETERMINATION AND SITUATIONS OF THE FIRM IN SHORT AND LONG RUN

PRESENTED BY:ANAND SARAN

MEANING OF PERFECT COMPETITIONA market structure in which the following five criteria are met:• All firms sell an identical product• All firms are price takers - they cannot control

the market price of their product• All firms have a relatively small market share• Buyers have complete information about the

product being sold and the prices charged by each firm

• The industry is characterized by freedom of entry and exit

EQUILIBRIUM OF INDUSTRY AND FIRM•Firms are price takers•The price is determined by the market

forces: market demand and market supply•The price for all the firms in the industry

is the same

•Price equilibrium of the industry: the point where demand=supply

•The firms will follow this price•Price=Marginal Revenue=Average

Revenue

OUTPUT DETERMINATION OF A FIRM•MR=MC•MC Curve intersects MR Curve from

below

DETERMINATION OF PROFIT OR LOSS OF A FIRM•The concept of average revenue and

average cost are used to determine the situation of profit or loss

•If AC=AR it means Normal Profit•If AC>AR it means Loss•If AC<AR it means Super Normal Profit

LONG RUN: NORMAL PROFIT

•AC=AR

SHORT RUNIn short run the firm can change only the variable factors and the fixed factors cannot be changedThe firm may face any one of the following situations in short run:•Normal Profit•Super Normal Profit •Loss

SHORT RUN: SUPER NORMAL PROFIT

•AR>AC

SHORT RUN: NORMAL PROFIT AND LOSS

SHUTDOWN POINT•The shutdown point is the situation where

a firm earns just enough revenue to cover its total variable costs.

•AVC=AR

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