{"id":4047,"date":"2020-03-24T04:10:49","date_gmt":"2020-03-24T04:10:49","guid":{"rendered":"https:\/\/commerceiets.com\/?p=4047"},"modified":"2020-03-24T04:10:49","modified_gmt":"2020-03-24T04:10:49","slug":"perfect-competition","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/perfect-competition\/","title":{"rendered":"PERFECT COMPETITION"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#PERFECT_COMPETITION\" title=\"PERFECT COMPETITION\">PERFECT COMPETITION<\/a><ul class='ez-toc-list-level-2' ><li class='ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#CHARACTERISTICS_OF_PERFECT_COMPETITION\" title=\"CHARACTERISTICS OF PERFECT COMPETITION\">CHARACTERISTICS OF PERFECT COMPETITION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#PRICE_AND_OUTPUT_DETERMINATION_UNDER_PERFECT_COMPETITION_OF_INDUSTRY\" title=\"PRICE\nAND OUTPUT DETERMINATION UNDER PERFECT COMPETITION OF INDUSTRY\">PRICE\nAND OUTPUT DETERMINATION UNDER PERFECT COMPETITION OF INDUSTRY<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#DEMAND_UNDER_PERFECT_COMPETITION\" title=\"DEMAND UNDER PERFECT COMPETITION\">DEMAND UNDER PERFECT COMPETITION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#SUPPLY_UNDER_PERFECT_COMPETITION\" title=\"SUPPLY UNDER PERFECT COMPETITION\">SUPPLY UNDER PERFECT COMPETITION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#EQUILIBRIUM_UNDER_PERFECT_COMPETITION\" title=\"EQUILIBRIUM UNDER PERFECT COMPETITION\">EQUILIBRIUM UNDER PERFECT COMPETITION<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#PRICE_AND_OUTPUT_DETERMINATION_UNDER_PERFECT_COMPETITION_OF_FIRM\" title=\"PRICE\nAND OUTPUT DETERMINATION UNDER PERFECT COMPETITION OF FIRM\">PRICE\nAND OUTPUT DETERMINATION UNDER PERFECT COMPETITION OF FIRM<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#PRICE_AND_OUTPUT_DETERMINATION_UNDER_SHORT_RUN\" title=\"PRICE\nAND OUTPUT DETERMINATION UNDER SHORT RUN\">PRICE\nAND OUTPUT DETERMINATION UNDER SHORT RUN<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/commerceiets.com\/perfect-competition\/#PRICE_AND_OUTPUT_DETERMINATION_OR_EQUILIBRIUM_IN_THE_LONG_RUN\" title=\"PRICE AND OUTPUT DETERMINATION OR EQUILIBRIUM IN THE LONG RUN\">PRICE AND OUTPUT DETERMINATION OR EQUILIBRIUM IN THE LONG RUN<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"perfect-competition\"><span class=\"ez-toc-section\" id=\"PERFECT_COMPETITION\"><\/span><strong>PERFECT COMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<p>A Perfect Competition market is that type of market in\nwhich the number of buyers and sellers is very large, all are engaged in buying\nand selling a homogeneous product without any artificial restrictions and\npossessing perfect knowledge of the market at a time.<\/p>\n\n\n\n<p><strong>ACCORDING TO MRS. JOAN ROBINSON<\/strong><\/p>\n\n\n\n<p>\u201cPerfect Competition prevails when the demand for the output of each producer is perfectly elastic.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO BOULDING<\/strong><\/p>\n\n\n\n<p>\u201cA Perfect Competition market may be defined as a large\nnumber of buyers and sellers all engaged in the purchase and sale of\nidentically similar commodities, who are in close contact with one another and\nwho buy and sell freely among themselves.\u201d<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"characteristics-of-perfect-competition\"><span class=\"ez-toc-section\" id=\"CHARACTERISTICS_OF_PERFECT_COMPETITION\"><\/span><strong>CHARACTERISTICS OF PERFECT COMPETITION<\/strong><strong><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The perfect competitive market possesses following features:<\/p>\n\n\n\n<p><strong>Large number of buyers and Sellers<\/strong><\/p>\n\n\n\n<p>In a perfectly competitive market, there will be a large\nnumber of buyers and sellers. <\/p>\n\n\n\n<p>Large number here denotes that the number of producers is\nso numerous that they cannot combine and influence the market price by their\ncombined action and decisions. The individual action will not affect the market\nprice because, the quantity offered by the individual producer will be so small\nwhen compared to the total quantity offered in the market, that the action of\nthe individuals will be very insignificant and it cannot influence the market\nprice. Output of a single firm may not influence the demand and price to a\ngreat deal in market as it is only a small percentage of overall output. <\/p>\n\n\n\n<p>Similarly, on the part of the buyers, the number is so large that there are no possibilities for them to dictate conditions in the market and influence the price by altering the <a href=\"https:\/\/commerceiets.com\/demand\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"demand (opens in a new tab)\">demand<\/a>. The <a href=\"https:\/\/commerceiets.com\/demand-function\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"individual demand (opens in a new tab)\">individual demand<\/a> will be so small that it will be insignificant if there is any change. So the market price cannot be altered either by sellers or by buyers by their actions individually; nor are there possibilities for a few of them to combine.<\/p>\n\n\n\n<p>In a perfectly competitive market, the individual firm is\nonly a \u2018Price taker\u2019 and not \u2018Price maker\u2019. They cannot have a price policy of\ntheir own and will pay attention mostly to reduce the cost of production. They\nwill adjust output to the market price.<\/p>\n\n\n\n<p><strong>Homogeneous Product<\/strong><\/p>\n\n\n\n<p>The second condition in the perfect market is that the commodity offered should be homogeneous and identical in all respects. The identity should be from the buyer\u2019s angle. The buyers should feel that the products offered by different sellers are the same in quality, size, taste, etc., so that the product of different firms are perfect substitutes in the eyes of the buyers and the cross <a href=\"https:\/\/commerceiets.com\/elasticity-of-demand\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"elasticity (opens in a new tab)\">elasticity<\/a> is infinite. If this is so, then a single seller cannot charge a higher price, as he will lose all his customers.<\/p>\n\n\n\n<p><strong>Free entry and exit conditions<\/strong><\/p>\n\n\n\n<p>The Third important condition in perfect competition is\nthat there are no artificial restrictions either preventing the entry of new\nfirms into the market or compelling the existing firms to continue. The firms\nhave full liberty to choose either to continue or go out of the industry. Entry\nand exit of firms purely depend on economic considerations only.<\/p>\n\n\n\n<p><strong>Perfect knowledge on the part of buyers and sellers<\/strong><\/p>\n\n\n\n<p>The fourth condition is the existence of perfect\nknowledge on the part of buyers and sellers about market conditions. The buyers\nknow in full about the commodity sold and the price prevailing in the market. <\/p>\n\n\n\n<p><strong>Perfect mobility of factors of production<\/strong><\/p>\n\n\n\n<p>The existence of perfect competition depends on perfect\nmobility of factors of production. The factor should be free to move from one\nuse to another easily depending on the remuneration they get.<\/p>\n\n\n\n<p><strong>Absence of transport cost<\/strong><\/p>\n\n\n\n<p>In a perfectly competitive market, it is assumed that\nthere are no transport costs. If transport costs are incurred, prices should be\ndifferent in different sectors of the market.<\/p>\n\n\n\n<p><strong>Absence of Government or artificial restrictions<\/strong><\/p>\n\n\n\n<p>Lastly it is assumed that there are no restrictions from\nany quarters hindering the smooth functioning of perfect competition. There is\nno government control or restriction on supply, pricing, etc, and the price\nshould be free to change in response to changes in demand supply conditions. If\nall these conditions are fulfilled, then the market can be termed perfect.<\/p>\n\n\n\n<p><strong>One Price of the Commodity<\/strong><\/p>\n\n\n\n<p>There is always one price of the commodity available in\nthe market.<\/p>\n\n\n\n<p><strong>Independent Relationship between Buyers and Sellers<\/strong><\/p>\n\n\n\n<p>There should not be any\nattachment between sellers and purchasers in the market. In real life&nbsp;<strong>\u201cPerfect Competition is a pure myth.\u201d<\/strong><\/p>\n\n\n\n<p><strong>Revenue Curves<\/strong><\/p>\n\n\n\n<p>In perfect competition an individual firm is price taker, because the price is determined by the collective forces of market demand and supply which are not influenced by the individual. When price is the same for all units of a commodity, naturally AR (Price) will be equal to MR i.e., AR = MR. <\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"404\" height=\"151\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-53.png\" alt=\"\" class=\"wp-image-4049\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-53.png 404w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-53-300x112.png 300w\" sizes=\"(max-width: 404px) 100vw, 404px\" \/><\/figure>\n\n\n\n<p>In above figure, on the X-axis, quantity is taken whereas on Y-axis, there is revenue. At price OP, the seller can sell any amount of the commodity. In this case the <a href=\"https:\/\/commerceiets.com\/revenue\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"average revenue (opens in a new tab)\">average revenue<\/a> curve is the horizontal line. The Marginal Revenue curve coincides with the Average Revenue.<\/p>\n\n\n\n<p>It is because\nadditional units are sold at the same price as before. In that case AR = MR. <\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"price-and-output-determination-under-perfect-competition-of-industry\"><span class=\"ez-toc-section\" id=\"PRICE_AND_OUTPUT_DETERMINATION_UNDER_PERFECT_COMPETITION_OF_INDUSTRY\"><\/span><strong>PRICE\nAND OUTPUT DETERMINATION UNDER PERFECT COMPETITION OF INDUSTRY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Under perfect competition, the buyers and sellers cannot\ninfluence the market price by increasing or decreasing their purchases or\noutput, respectively. The market price of products in perfect competition is\ndetermined by the industry. This implies that in perfect competition, the market\nprice of products is determined by taking into account two market forces,\nnamely market demand and market supply.<\/p>\n\n\n\n<p><strong>ACCORDING TO MARSHALL<\/strong><\/p>\n\n\n\n<p>\u201cBoth the elements of demand and supply are required for\nthe determination of price of a commodity in the same manner as both the blades\nof scissors are required to cut a cloth.\u201d <\/p>\n\n\n\n<p><strong>Market demand<\/strong> is defined as a sum of the quantity demanded by each\nindividual organizations in the industry.<\/p>\n\n\n\n<p>On the other hand, <strong>market\nsupply<\/strong> refers to the sum of the quantity supplied by individual\norganizations in the industry. <\/p>\n\n\n\n<p>In perfect competition, the price of a product is\ndetermined at a point at which the demand and supply curve intersect each\nother. This point is known as equilibrium point as well as the price is known\nas equilibrium price. In addition, at this point, the quantity demanded and\nsupplied is called equilibrium quantity. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"demand-under-perfect-competition\"><span class=\"ez-toc-section\" id=\"DEMAND_UNDER_PERFECT_COMPETITION\"><\/span><strong>DEMAND UNDER PERFECT COMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Demand refers to the quantity of a product that consumers are willing to purchase at a particular price, while other factors remain constant. A consumer demands more quantity at lower price and less quantity at higher price. Therefore, the demand varies at different prices.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"355\" height=\"197\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-54.png\" alt=\"\" class=\"wp-image-4050\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-54.png 355w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-54-300x166.png 300w\" sizes=\"(max-width: 355px) 100vw, 355px\" \/><\/figure>\n\n\n\n<p>As shown in Figure, when price is OP, the quantity\ndemanded is OQ. On the other hand, when price increases to OP1, the quantity\ndemanded reduces to OQ1. Therefore, under perfect competition, the demands\ncurve (DD\u2019) slopes downward.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"supply-under-perfect-competition\"><span class=\"ez-toc-section\" id=\"SUPPLY_UNDER_PERFECT_COMPETITION\"><\/span><strong>SUPPLY UNDER PERFECT COMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Supply refers to quantity of a product that producers are willing to supply at a particular price. Generally, the supply of a product increases at high price and decreases at low price.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"358\" height=\"269\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-55.png\" alt=\"\" class=\"wp-image-4051\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-55.png 358w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-55-300x225.png 300w\" sizes=\"(max-width: 358px) 100vw, 358px\" \/><\/figure>\n\n\n\n<p>In Figure, the quantity supplied is OQ at price OP. When\nprice increases to OP1, the quantity supplied increases to OQ1. This is because\nthe producers are able to earn large profits by supplying products at higher\nprice. Therefore, under perfect competition, the supply curves (SS\u2019) slopes\nupward.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"equilibrium-under-perfect-competition\"><span class=\"ez-toc-section\" id=\"EQUILIBRIUM_UNDER_PERFECT_COMPETITION\"><\/span><strong>EQUILIBRIUM UNDER PERFECT COMPETITION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>In perfect competition, the price of a product is determined at a point at which the demand and supply curve intersect each other. This point is known as equilibrium point. At this point, the quantity demanded and supplied is called equilibrium quantity.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"446\" height=\"253\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-56.png\" alt=\"\" class=\"wp-image-4052\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-56.png 446w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-56-300x170.png 300w\" sizes=\"(max-width: 446px) 100vw, 446px\" \/><\/figure>\n\n\n\n<p>In Figure, it can be seen that at price OP1, supply is\nmore than the demand. Therefore, prices will fall down to OP. Similarly, at\nprice OP2, demand is more than the supply. Similarly, in such a case, the\nprices will rise to OP. Thus, E is the equilibrium at which equilibrium price\nis OP and equilibrium quantity is OQ.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"price-and-output-determination-under-perfect-competition-of-firm\"><span class=\"ez-toc-section\" id=\"PRICE_AND_OUTPUT_DETERMINATION_UNDER_PERFECT_COMPETITION_OF_FIRM\"><\/span><strong>PRICE\nAND OUTPUT DETERMINATION UNDER PERFECT COMPETITION OF FIRM<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A firm is\nin&nbsp;equilibrium&nbsp;when it maximizes its profits. Hence, the\noutput that offers maximum profit to a firm is the equilibrium output. When a\nfirm is in equilibrium, there is no reason to increase or decrease the output.<\/p>\n\n\n\n<p>In a\ncompetitive&nbsp;market, firms are price-takers. The reason being the\npresence of a large number of firms who produce homogeneous products.\nTherefore, firms cannot influence the price in their individual capacities.\nThey have to follow the price determined by the industry.<\/p>\n\n\n\n<p><strong>Conditions\nfor the equilibrium of a firm<\/strong><\/p>\n\n\n\n<p>To attain an equilibrium position, a firm must satisfy\nthe following two conditions:<\/p>\n\n\n\n<p>They must ensure that the marginal&nbsp;revenue&nbsp;is\nequal to the marginal cost (MR = MC).<\/p>\n\n\n\n<ul><li>If MR &gt; MC, the firm has an incentive to expand its production and sell additional units.<\/li><li>If MR &lt; MC, the firm must reduce the output since additional units add more cost than      revenue.<\/li><li>The firm gets maximum profits only when MR = MC.<\/li><li>The MC curve must have a positive slope and cut the MR curve from below.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"554\" height=\"253\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-57.png\" alt=\"\" class=\"wp-image-4053\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-57.png 554w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-57-300x137.png 300w\" sizes=\"(max-width: 554px) 100vw, 554px\" \/><\/figure>\n\n\n\n<p>In Figure above,\nDD is the demand curve and SS is the supply curve. They equilibrate at point E\nand set the market price as OP. Under perfect competition, firms adopt OP as\nthe industry price and consider the P-line as the demand curve or AR \u2013&nbsp;average&nbsp;revenue curve (perfectly elastic at P).<\/p>\n\n\n\n<p>Since all\nunits are equally priced, the MR curve is a horizontal line and is equal to the\nAR line. Observe that the curve MC cuts the MR curve at two points \u2013 T and R.\nAt point T, the MC curve cuts the MR curve from above whereas at point R it\ncuts the MR curve from below. Therefore, according to the conditions of\nequilibrium of a firm, point R is the point of equilibrium and OQ<sub>2<\/sub>&nbsp;is\nthe equilibrium level of output.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"price-and-output-determination-under-short-run\"><span class=\"ez-toc-section\" id=\"PRICE_AND_OUTPUT_DETERMINATION_UNDER_SHORT_RUN\"><\/span><strong>PRICE\nAND OUTPUT DETERMINATION UNDER SHORT RUN<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Short period is the span of time so short that existing\nplants cannot be extended and new plants cannot be erected to meet increased\ndemand. However, the time is adequate enough for producers to adjust to some\nextent their output to the increase in demand by overworking their fixed\ncapacity plants. In the short run, therefore, supply curve is elastic.<\/p>\n\n\n\n<p>The average and marginal cost curves of the firm together with its demand curve determine equilibrium in short run.. Demand curve, in a perfectly competitive market, is also the average revenue curve and the marginal revenue curve of the firm. The <a href=\"https:\/\/commerceiets.com\/concept-of-costs\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"marginal cost (opens in a new tab)\">marginal cost<\/a> intersects the average cost at its minimum point. The U-shape of both the cost curves reflects the law of variable proportions operative in the short run during which the size of the plant remains fixed.<\/p>\n\n\n\n<p><strong>For the equilibrium of a firm the two conditions must be fulfilled:<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"331\" height=\"218\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-58.png\" alt=\"\" class=\"wp-image-4054\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-58.png 331w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-58-300x198.png 300w\" sizes=\"(max-width: 331px) 100vw, 331px\" \/><\/figure>\n\n\n\n<p><strong>(a) MR=MC: <\/strong>The marginal cost must be equal to the marginal revenue. However,\nthis condition is not sufficient, since it may be fulfilled and yet the firm\nmay not be in equilibrium. The above figure shows that marginal cost is equal\nto marginal revenue at point e\u2019, yet the firm is not in equilibrium as Oq\noutput is greater than Oq\u2019.<\/p>\n\n\n\n<p><strong>(b) MC CUTS MR FROM BELOW:<\/strong> The second and necessary condition for equilibrium\nrequires that the marginal cost curve cuts the marginal revenue curve from\nbelow i.e. the marginal cost curve be rising at the point of intersection with\nthe marginal revenue curve.<\/p>\n\n\n\n<p>Thus, a perfectly competitive firm will adjust its output\nat the point where its marginal cost is equal to marginal revenue or price, and\nmarginal cost curve cuts the marginal revenue curve from below.<\/p>\n\n\n\n<p><strong>RETURNS IN SHORT RUN<\/strong><\/p>\n\n\n\n<p>The fact that a firm is in equilibrium does not imply\nthat it necessarily earns supernormal profits. In the short-run equilibrium\nfirms may earn supernormal profits, normal profits or may incur losses.<\/p>\n\n\n\n<p><strong><em>SUPER NORMAL PROFITS:<\/em><\/strong> Whether the firm makes supernormal profits, normal profits or incurs losses depends on the level of the average cost at the short run equilibrium. If the average cost is below the average revenue, the firm earns supernormal profits. The following figure illustrates that the average cost QC is less than average revenue QB, and the firm earns profits equal to the area ABCD.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"263\" height=\"191\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-59.png\" alt=\"\" class=\"wp-image-4055\"\/><\/figure>\n\n\n\n<p><a href=\"http:\/\/cdn.economicsdiscussion.net\/wp-content\/uploads\/2017\/11\/clip_image010-5.jpg\" target=\"_blank\" rel=\"noopener\"><strong><\/strong><\/a><\/p>\n\n\n\n<p><strong><em>LOSS<\/em>: <\/strong>If the average cost is above the average revenue the firm makes a loss. The following figure shows that the Average cost QF is higher than QG average revenue and the firm is incurring loss equal to the shaded area EFGH. In this case the firm will continue to produce only if it is able to cover its variable costs. Otherwise it will close down, since by discontinuing its operations the firm is better off; it minimizes its losses. The point at which the firm covers its variable costs is called \u2018the closing-down point\u2019. If the price falls below or average costs rise, the firm does not cover its variable costs and is better off if it closes down.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"235\" height=\"229\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-60.png\" alt=\"\" class=\"wp-image-4056\"\/><figcaption><strong>PERFECT COMPETITION<\/strong><\/figcaption><\/figure>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"price-and-output-determination-or-equilibrium-in-the-long-run\"><span class=\"ez-toc-section\" id=\"PRICE_AND_OUTPUT_DETERMINATION_OR_EQUILIBRIUM_IN_THE_LONG_RUN\"><\/span><strong>PRICE AND OUTPUT DETERMINATION OR EQUILIBRIUM IN THE LONG RUN<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The long run is a period of time long enough to permit changes in the variable as well as in the fixed factors. In the <a href=\"https:\/\/commerceiets.com\/difference-between-short-run-long-run-production-function\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"long run (opens in a new tab)\">long run<\/a>, accordingly, all factors are variable and non- fixed. Thus, in the long run, firms can change their output by increasing their fixed equipment. They can enlarge the old plants or replace them by new plants or add new plants.<\/p>\n\n\n\n<p>Moreover, in the long run, new firms can also enter the\nindustry. On the contrary, if the situation so demands, in the long run, firms\ncan diminish their fixed equipments by allowing them to wear out without\nreplacement and the existing firm can leave the industry.<\/p>\n\n\n\n<p>Thus, the long run equilibrium will refer to a situation\nwhere free and full scope for adjustment has been allowed to economic forces.\nIn the long run, it is the long run average and marginal cost curves, which are\nrelevant for making output decisions. Further, in the long run, average\nvariable cost is of no particular relevance. The average total cost is of\ndetermining importance, since in the long run all costs are variable and none\nfixed.<\/p>\n\n\n\n<p><strong>SUPER NORMAL PROFITS<\/strong><\/p>\n\n\n\n<p>In the short run a firm under perfect competition is in\nequilibrium at that output at which marginal cost equals price or Marginal\nRevenue. This is equally valid in the long run. But, in the long run for a\nperfectly competition firm to be in equilibrium, besides marginal cost being\nequal to price, price must also be equal to average cost. If the price is\ngreater than the average cost, the firms will be making supernormal profits.<\/p>\n\n\n\n<p><strong>NORMAL PROFITS<\/strong><\/p>\n\n\n\n<p>Lured by these supernormal profits, new firms will enter\nthe industry and these extra profits will be competed away. When the new firms\nenter the industry, the supply or output of the industry will increase and\nhence the price of the output will be forced down. The new firms will keep\ncoming into the industry until the price is depressed down to average cost, and\nall firms are earning only normal profits.<\/p>\n\n\n\n<p><strong>LOSSES<\/strong><\/p>\n\n\n\n<p>On the other hand, if the price happens to be below the\naverage cost, the firms will be incurring loses. Some of the existing firms\nwill quit the industry. As a result, the output of the industry will decrease\nand the price will rise to equal the average cost so that the firms remaining\nin the industry are making normal profits. Hence, in the long run, firms need\nnot be forced to produce at a loss since they can leave the industry, if they\nare having losses. Thus, for a perfectly competitive firm to be in equilibrium\nin the long run, price must equal marginal and average cost.<\/p>\n\n\n\n<p>Now when average cost curve is falling, marginal cost\ncurve is below it, and when average cost curve is rising, marginal cost curve\nmust be above it. Hence, marginal cost can be equal to the average cost only at\nthe point where average cost curve is neither falling nor rising, i.e. at the\nminimum point of average cost curve. Therefore, it is at the point of minimum\naverage cost curve, and the two are equal there.<\/p>\n\n\n\n<p><strong>CONDITIONS FOR EQUILIBRIUM<\/strong><\/p>\n\n\n\n<p><strong>The conditions for long run\nequilibrium of perfectly competitive firm can be written as:<\/strong><\/p>\n\n\n\n<p>Price = Marginal Cost = Minimum Average Cost.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"305\" height=\"223\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-61.png\" alt=\"\" class=\"wp-image-4057\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-61.png 305w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-61-300x219.png 300w\" sizes=\"(max-width: 305px) 100vw, 305px\" \/><figcaption><strong>PERFECT COMPETITION<\/strong><\/figcaption><\/figure>\n\n\n\n<p>The conditions for the long run equilibrium of the firm\nunder perfect competition can be easily understood from the diagram, where LAC\nis the long run average cost curve and LMC in the long run marginal cost curve.\nThe firm under perfect competition cannot be in long run equilibrium at price\nOP\u2019, because though the price OP\u2019 equals MC at G (i.e., at output OQ) but it is\ngreater than the average cost at this output and, therefore, the firm will be\nearning supernormal profits.<\/p>\n\n\n\n<p>Since all the firms are assumed to be identical, all\nwould be earning supernormal profits. Hence, there will be attraction for the\nnew firms to enter the industry. As a result, the price will be forced down to\nthe level Op at which price, the firm is in equilibrium at F and is producing\nOQ\u201d output.<\/p>\n\n\n\n<p>At point F or equilibrium output OQ\u201d, the price is equal\nto average cost, and hence the firm will be earning only normal profits.\nTherefore, at price OP, there will be no tendency for the outside firms to\nenter the industry. Hence, the firm will be in equilibrium at OP price and OQ\noutput.<\/p>\n\n\n\n<p>On the contrary, a firm under perfect competition cannot\nbe in the long run equilibrium at price OP\u201d. Though price OP\u201d is equal to\nmarginal cost at point E, or at output OQ\u201d but price OP\u201d is lower than the\naverage cost at this point and thus the firm will be incurring losses.<\/p>\n\n\n\n<p>Since all the firms in the industry are identical in\nrespect of cost curves, all would be incurring losses. To avoid these losses,\nsome of the firm will leave the industry. As a result, the price will rise to\nOP, where again all firms are making normal profits. When the price OP is\nreached, the firms would have no further tendency to quit.<\/p>\n\n\n\n<p><strong>Thus, to conclude that at price\nOP, the firm under perfect competition is in equilibrium in the long run when:<\/strong><\/p>\n\n\n\n<p>Price = MC = Minimum AC<\/p>\n\n\n\n<p>Now, at price OP, besides all firms being in equilibrium at output OQ, the industry will also be in equilibrium, since there will be no tendency for new firms to enter or the existing firms to leave the industry, because all will be earning normal profits. Thus, at OP price, full equilibrium, i.e. equilibrium of all the individual firms and also of the industry, as a whole, is achieved in the long run under perfect competition.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/demand\/\">Theory of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-demand\/\">Law of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/demand-function\/\">Demand Function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/exceptions-of-law-of-demand\/\">Exceptions of law of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/elasticity-of-demand\/\">Elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/change-in-demand\/\">Change in demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/price-elasticity-of-demand\/\">Price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-law-of-demand-and-elasticity-of-demand\/\">Law of demand Vs Elasticity of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/factors-affecting-price-elasticity-of-demand\/\">Factors affecting price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/production-function\/\">Production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-short-run-long-run-production-function\/\">Short run vs long run production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-variable-proportions\/\">Law of variable proportions<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/types-of-demand\/\">Types of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/managerial-economics\/\">Managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/characteristics-of-managerial-economics\/\">Characteristics of managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-managerial-economics\/\">Scope of managerial economics<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/utility-analysis\/\">Utility analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/\">Law of diminishing marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-equi-marginal-utility\/\">Law of equi marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium\/\">Consumers Equilibrium<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/indifference-curve-analysis\/\">Indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium-using-indifference-curve-analysis\/\">Consumer equilibrium using indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-tp-ap-and-mp\/\">Relationship between TP, AP and MP<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-increasing-returns\/\">Law of increasing returns<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-returns\/\">Law of diminishing returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-constant-returns\/\">Law of constant returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/returns-to-scale\/\">Returns to Scale<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/economies-and-diseconomies-of-scale\/\">Economies and diseconomies of scale<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/concept-of-costs\/\">Concept of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-ac-and-mc\/\">Relationship between AC and MC<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/traditional-theory-of-cost\/\">Traditional theory of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/\">Modern theory of costs<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explicit-vs-implicit-costs\/\">Explicit vs Implicit costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/revenue\/\">Revenue<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-competition\/\">Perfect competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-meaning\/\">Monopoly<\/a>&nbsp;<\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/price-discrimination\/\">Price discrimination<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-perfect-competition-and-monopoly\/\">Difference between perfect competition and monopoly<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-and-monopolistic-competition\/\">Perfect Vs Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-and-monopolistic-competition\/\">Monopoly and monopolistic competition<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/product-differentiation-strategy\/\">Product differentiation strategy<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopolistic-competition\/\">Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/national-income-in-india\/\">National Income in India<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/measurement-of-national-income\/\">Measurement of national income in India<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/consumption-function\/\">Consumption function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/\">Keynes Psychological law of consumption<\/a><\/td><td><\/td><td><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"266\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg\" alt=\"PERFECT COMPETITION\" class=\"wp-image-787\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg 1024w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-300x78.jpg 300w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-768x199.jpg 768w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1536x398.jpg 1536w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize.jpg 1920w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><figcaption>PERFECT COMPETITION<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>PERFECT COMPETITION A Perfect Competition market is that type of market in which the number of buyers and sellers is very large, all are engaged in buying and selling a homogeneous product without any artificial restrictions and possessing perfect knowledge of the market at a time. ACCORDING TO MRS. JOAN ROBINSON \u201cPerfect Competition prevails when&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/perfect-competition\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;PERFECT COMPETITION&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":4048,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[113,92],"tags":[],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/4047"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=4047"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/4047\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/4048"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=4047"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=4047"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=4047"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}