Equlibrium Under Perfect Competition

https://www.youtube.com/watch?v=bwF2UhagVng

1. EQUILIBRIUM UNDER
PERFECT COMPETITION
By
Dr. RakshaSingh
Principal
Shri ShankaracharyaMahavidyalaya
[email protected]
ssmv.ac.in
Dr. RAKSHA SINGH

2. PERFECTCOMPETITION
According to Boulding
“A perfect competition market may be defined
as a large number of buyers and sellers all
engaged in the purchases and sale of identically
similar commodities, who are in close contact
with one another and who buy and sell freely
among themselves.”
Dr. RAKSHA SINGH

3. CONDITIONS OF PERFECT
COMPETITION
1. Large number of buyers and sellers
It must be large so individually not able to influence price and output of industry.
Supplier is ‘output adjuster’
2. Homogeneous Product
Product produced by all sellers are perfect substitutes. E.g. Salt, Wheat, Cotton
3.Freedom of entry and exit of firms
If industry earns excess profit ,new firms join .In case of loss some firms leave
4. Perfect mobility of Goods and factors
Goods are free to move to those places where they can fetch the highest price.
Factors can also move from a low paid to a high paid industry.
5. Absence of artificial restrictions
Prices are liable to change freely in response to demand-supply conditions. No
restrictions from government or other industries
Dr. RAKSHA SINGH

4. CONDITIONS OF PERFECT
COMPETITION…
6.Absence of Transport costs
If transport cost is added ,even a homogeneous commodity will have different
prices depending upon the transport costs from the place of supply
7. Perfect knowledge of Market conditions
Buyers and sellers know everything
8. Uniform Price
Since price is determined by joint efforts of buyer and seller, same price prevails in
the market
9. Normal Profit maximization
All firms have a common goal of profit maximization ,but can make super
normal profit in short run in long run only normal profit
10. No Discrimination
Buy and sell freely without offering any discount or favoursto selected individuals
Dr. RAKSHA SINGH

5. PERFECT Vs PURE
COMPETITION
They differ only in degree
Pure competition is narrower term
Pure competition includes only
Large number of buyers and sellers
Homogeneous products
Free entry and exit
Real world does not fulfil the conditions of perfect competition
and Pure competition but we study this to understand
working of an economy.
Dr. RAKSHA SINGH

6. PRICE DETERMINATION UNDER
PERFECT COMPETITION
Under Perfect Competition Industry is Price Maker and
Firm is Price Taker
Two parties that bargain in a market-Buyers and
Sellers
It is only when they agree a commodity can be bought
and sold at a certain price
Product pricing is influenced by both-B&S
Law of demand is applicable to buyers
Law of supply is applicable to sellers
Dr. RAKSHA SINGH

7. PRICE DETERMINATION UNDER
PERFECT COMPETITION…..
Dr. RAKSHA SINGH
Price (in Rs)Quantity
Demanded
Quantity
Supplied
10 100 10
20 90 15
30 80 35
40equilibrium
price
60 60 equilibrium
quantity
50 40 95

8. PRICE DETERMINATION UNDER
PERFECT COMPETITION…
Firm will be in equilibrium when it will earn
maximum profit
Two conditions must be fulfilled
First order Condition (Necessary Condition)-
Marginal Revenue =Marginal Cost
MR must be equal to MC
Second order Condition (Secondary and Sufficient
condition)-
MC Curve must cut MR from below,
MC Curve must be rising
Dr. RAKSHA SINGH

9. PRICE DETERMINATION UNDER
PERFECT COMPETITION…….
Equilibrium at point E where
MC=MR and MC cuts from below
Dr. RAKSHA SINGH
In the curve
OY axis measures
Revenue=Price=Cost
OX axis measures Output
MC= Marginal Cost curve
OP= Price=MR=AR
At Point T and E MC cuts MR
As per first condition T and E
both are fulfilling but as per
second condition /sufficient
condition,
Equilibrium of firm will be at
Point E
TP E

10. EQUILIBRIUM OF A FIRM IN
SHORT RUN
Short Run is characterised by the market condition in
which new firms cannot be established
Firms cannot expand their output
No new techniques will be developed
During short run, firm has to confront with two types of
cost
Fixed Cost-Not possible for the firms to recover the FC in
the short run .Therefore firms output decision are not
influenced by the fixed cost
Variable Cost –Firm must recover variable cost in the
short run, In case firm fails to recover the average
variable cost in the short run, firm will decide not to
produce and shut down the business to minimise losses
Dr. RAKSHA SINGH

11. EQUILIBRIUM OF A FIRM IN
SHORT RUN….
•1. Case
Short Run
Supernormal
/Abnormal
Profits
•2. Case
Short Run
Economic
Loss
•3. Case
Short Run
Normal
Profits
In the short run three cases
Dr. RAKSHA SINGH

12. EQUILIBRIUM OF A FIRM IN
SHORT RUN..1
Firms Equilibrium is attained at green
point where MC=MR &MC cuts MR from
below, at Price=P and Output=Q
Average Cost to produce goods is at
black point ,cost price is =C
Average cost to produce goods is at
Black Point Price =C and Output=Q
Supernormal Profit area is in
green(rectangle), Where selling price is
P and Average Cost is C
In this situation more firms enter,and
start this business to share profit
Dr. RAKSHA SINGH

13. EQUILIBRIUM OF A FIRM IN
SHORT RUN..2
Firms Equilibrium is attained at
green point where MC=MR
&MC cuts MR from below. at
Price=AR
Average Cost to produce goods is
at black point ,cost price is =C
Economic Loss area is in brick
colour(CP..)because Cost is
more that selling price
In this situation firms will exit
Dr. RAKSHA SINGH

14. EQUILIBRIUM OF A FIRM IN
SHORT RUN..3
Firms Equilibrium is
attained at price P where
MC=MR=AR
AC = AR= P( Price) Cost
to produce is equal to
AC=P and AVC is below
AC(AVC<AC)
Firm will earn Normal
Profit
Firms neither enter nor
exit
Dr. RAKSHA SINGH

15. EQUILIBRIUM OF A FIRM IN
LONG RUN
In the long run
firm will earn only
normal profit
Inefficient firms
will close down
or try to
improve
efficiency
MR=LMC=LAC=
AR=Price
Dr. RAKSHA SINGH

16. Questions
Q1 In the perfect competition
at short run, the firm is a price
……and can sell… amount of
output at the going market
price
1.Taker, a definite
2.Maker,any
3.Taker,any
4.None of the above
Q2For a competitive firm,long
period normal price will
1.Equal AC and MC or
production
2.Equal MC of production
only
Equal TC of production only
Equal AC of production only
Dr. RAKSHA SINGH

17. Answers
Q1-3
Q2-1
Dr. RAKSHA SINGH

18. WORDS IN HINDI
Dr. RAKSHA SINGH

19. References
Dr. RAKSHA SINGH
www.economicsdiscussion.n
et/perfect-
competition/perfect-
competition
Modern Economic Theory,
KKDewett,2000
Wikipedia
Google photos
IC Dinghra, 1999

20. Dr. RAKSHA SINGH
THANK YOU