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 economicsdeshpande@gmail.com

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