The document discusses the concepts of perfect competition and short run equilibrium of a firm under perfect competition. It defines perfect competition and its key features including a large number of buyers and sellers, homogeneous products, free entry and exit in the market, and complete market information. It then explains the short run equilibrium of the firm, where the firm produces at the minimum point of the average cost curve where marginal cost equals marginal revenue. The firm earns excess profits, which is profit earned above normal profits.
The document discusses the concepts of perfect competition and short run equilibrium of a firm under perfect competition. It defines perfect competition and its key features including a large number of buyers and sellers, homogeneous products, free entry and exit in the market, and complete market information. It then explains the short run equilibrium of the firm, where the firm produces at the minimum point of the average cost curve where marginal cost equals marginal revenue. The firm earns excess profits, which is profit earned above normal profits.
The document discusses the concepts of perfect competition and short run equilibrium of a firm under perfect competition. It defines perfect competition and its key features including a large number of buyers and sellers, homogeneous products, free entry and exit in the market, and complete market information. It then explains the short run equilibrium of the firm, where the firm produces at the minimum point of the average cost curve where marginal cost equals marginal revenue. The firm earns excess profits, which is profit earned above normal profits.
The document discusses the concepts of perfect competition and short run equilibrium of a firm under perfect competition. It defines perfect competition and its key features including a large number of buyers and sellers, homogeneous products, free entry and exit in the market, and complete market information. It then explains the short run equilibrium of the firm, where the firm produces at the minimum point of the average cost curve where marginal cost equals marginal revenue. The firm earns excess profits, which is profit earned above normal profits.
Class: FYBCOM-C Roll No. : 404 Subject: Business Economics Short run Equilibrium of firm under perfect competition Meaning: In economic theory, perfect competition occurs when all companies sell identical products, market share does not influence price, companies are able to enter or exit without barriers, buyers have perfect or full information, and companies cannot determine prices. In other words, it is a market that is entirely influenced by market forces. It is the opposite of imperfect competition, which is a more accurate reflection of a current market structure Features of perfect competition A large number of buyers and sellers: Both buyers and sellers are in a large number, so that individually neither buyer nor seller is in a position to influence the price. Homogeneous Commodity: A commodity sold in the market is homogeneous, that is, identical in quality and quantity. A difference of any type would provide an excuses for the sellers to charge a higher price. Free entry and exit: There is no restriction what so ever for any producer to produce a commodity and sell it in the market. Restriction may be in the form of Government’s licence. Complete market information: A perfect knowledgeable or a complete information about the market price, demand, supply etc. Is expected to be possessed by all the buyers and sellers. Excess Profit:
The form accepts the market price OP. At OP price the firm is in equilibrium at N. At the point N the firm fulfils the equilibrium conditions i.e. MC=MR and MC is increasing at that point. By dropping a perpendicular from N to the X-axis, we measure the total output produced i.e. OQ The firm’s total revenue (TR) is worked out by multiplying output (OQ) by price (OP). TR =OP×OQ=OQNP Total cost is worked out by the multiplying output by average cost which is obtained at the point where ON line cuts average cost (AC) curve at point R. TC = OQ×QR = OQNP The firms equilibrium position with the excess profit is explained below. Price = OP Output = OQ TR = OQNP TC = OQRS Profit = TR-TC = OQNP – OQRS = SRNP The firm earns excess profit = SRNP Excess profit is the profit earned by a firm over and above the normal profit. It is also called supernormal profit. THANK YOU
