Perfect Competition PDF

BBA 102 BUSINESS ECONOMICS (MICRO & MACRO) Perfect Competition Characteristics of Perfect Competition Large number of sellers and buyers Selling the same products Producers are price takers Freedom of entry and exit least government intervention Perfect Market knowl...

BBA 102 BUSINESS ECONOMICS (MICRO & MACRO) Perfect Competition Characteristics of Perfect Competition Large number of sellers and buyers Selling the same products Producers are price takers Freedom of entry and exit least government intervention Perfect Market knowledge Profit-maximising goal  Profit maximization conditions : A firm is in equilibrium when it maximises its profit : Ⲡ = TR - TC where TR = total revenue and TC = Total cost Profit(Ⲡ) maximised at the output level where MR = MC where MR = Marginal Revenue, the slope of TR curve(an additional increment to the output, there is a change in the revenue),and, MC is a firm’s Marginal Cost, an additional cost of producing one additional output unit. When MR > MC - Expansion is desirable MR < MC - Profits reduce MC is rising Total Revenue-Total Cost Approach of Profit-maximisation  Profit maximization by a Competitive Firm In the short-run, a firm can make either negative profits or abnormal profits. In the long-run, since all factors are variable, the least profit a firm can make are zero economic profits(that is, it can go out of business) A competitive firm faces a horizontal demand curve whose height is determined by the market price (P) - the price charged by the other firms in the market. The demand curve facing an individual firm in a competitive market is both its Average Revenue(AR) and Marginal Revenue(MR) curves: AR = MR = P When Average Total Cost(ATC) is below (P) - there is Excess profit When ATC is above P - there is loss A firm might still continue to produce so long as its P is above its AVC - Closing down or shutdown point) The short-run supply curve is its MC curve above the point P = AVC Short-run Demand & Supply of a competitive firm Demand Supply Short-run Zero Profit Short-run negative profit Short-run abnormal profit Long-run Profit Maximization The long-run average costs(LAC) curve reflects the presence of economies and diseconomies of scale. The long-run marginal costs(LMC) curve cuts the LAC curve from the bottom and at its minimum point. The firm maximises profit by choosing the output at which price (P) = LMC = ATC =AR = MR Higher the market price, higher the profit earned No firm has an incentive to either enter or exit the market because all firms are earning zero economic profit. A long-run supply curve is horizontal if it is a constant-cost industry and is upward-sloping if an increasing-cost industry. Long-run Equilibrium of a perfectly competitive market Long-run Supply Curve of a competitive firm Constant-cost Industry Increasing-cost Industry THANK YOU www.inspiria.edu.in