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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
THANK YOU