Price and output determination under perfec competition

Method of determination of price and output under perfect competition

1. PERFECT COMPETITION: PRICE AND OUTPUT DETERMINATION AND SITUATIONS OF THE FIRM IN SHORT AND LONG RUN PRESENTED BY: ANAND SARAN

2. MEANING OF PERFECT COMPETITION A 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

3. 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

4. Price equilibrium of the industry: the point where demand=supply The firms will follow this price Price=Marginal Revenue=Average Revenue

5. OUTPUT DETERMINATION OF A FIRM MR=MC MC Curve intersects MR Curve from below

6. 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 N ormal Profit

7. LONG RUN: NORMAL PROFIT AC=AR

8. SHORT RUN In short run the firm can change only the variable factors and the fixed factors cannot be changed The firm may face any one of the following situations in short run: Normal Profit Super Normal Profit Loss

9. SHORT RUN: SUPER NORMAL PROFIT AR>AC

10. SHORT RUN: NORMAL PROFIT AND LOSS

11. SHUTDOWN POINT The shutdown point is the situation where a firm earns just enough revenue to cover its total variable costs. AVC=AR

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