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OUESTION \,/
Competition
The mirket structure in which there are targe number oi buyers
and
2) Normal
Firm
equal,
This
Diagram
ntical, r))t/
rfect knowledge
'
All b,J1,s;5 and sellers must have conlpiete and perfect knowledge about
activities.
t"
rfect mobility
Und", perfecl competition factors of production can move from one place
exit
ln casdlerfect competition new flrms can enter into the industry and the
sling flrms can leave the industry. This condition is applicable in long run'
ExPlanati
The
OP i5 the (
Her
, t.-
-T,)l,,Li' 1c,
ihrket.
',,
price
Single pnce
)tn9te
Under perfect comPetition single price prevails in the whole market which
rmined by the forces of demand and supply.
uilibrium of a Firm
tI. sufficient
a flrm:
.FlC.= t'lR
condition
lrlc curve musl cul
'
., '
...:
ivlR
curve lrom
belo!,
3) Nqrm
Fir
TI
Diagran
Perfect ComPetition
ration
Theifirm
the-firm is in equilibrium at point "E". OQ is the equilibriurn quanuty while
dquilibrium price.
he eiquilibrium
the
Price.
:
Here
'
"\
ag = A.ri
'o'n
oQ
'ic=(ai)(outpu0
TC = (AB) (oQ)
TC=oQAB
-
= El
ouiPur=o-Q
ourpur =
.^
(EP) (output)
TR= (EP) (oQ)
TR = OQEP
TR
PIofit-N=TR,TC
N=OQEP-OQAB
tl = EPAB
'mal Drofit
t*ir'i
iiii,
"urn' "orral
rhis can be explained *ith
LJ-n'il)
il;;"i;
l'fE:d;;':
,v'c
aaC
ie"'
L6k+
Qa'rer,ttL's P
'"''
rc
OQ is
p) ,oQ.r
= (e
TC = OOEP
Gkl
"t".
Rdotu\u
AR=EP
OutpuL= OQ
TR = (EP) (Output)
TR = (EP) (OQ)
TR = OQEP
TR=TC=OQEP
q
I-OSE
?
'
(X-a-is
)
L
sMC
GtF
&
D/
l=c,\e
/
.7'
Reyetu,tL, ? l--1AS---,^:'''-"' ' | -iF=;r=;.-r--
Explan,
T
OP is th,
P.c>wt<
4K:MA
i,ti, ; ll
'r\ Yf
In the above diagram level of oulpuL is measured along \_axis whjle cosl
revenues are taken on y-axis. Firm js not in equilibrium
situation at point
Because at Lhis point necessary condilion is fulfliled but ,rff"i"ri
.onjiton
)t valid. Points 'fi",'and 'D,, are also not equitibrium points Oecauie
ifref Oo
,ii q,! ryu,',u,,uIr LU
conditions.
urLrulls. rrrm
Firm ts
is jn
ln
equiribrium
equ
tDnum
,irr"ii",
situalion
at
noini,,F,
p"iri "r"
l:,11_,n::o::,:orlrl
Mc-and t4R are equal and slope oF MC is grealer Lhan SrrJ;i-taR
"t
re uP will be the equilibrium price and
:'a)
sh*r
OQa
rirn possibitities
Short run
"short run ir{time period in
which a firm can only change
. its variable factors of
. production.',
in
Abnormal profit
Norrial profit
Normal loss
Shutdown point
costs.
loss o;
ns th
(y-q-ir,
musl
,,5
SAC
JAr(
?
3 ?s9F_[
AfuF4(
(x
-o*; 5 7
u1
I
PerFect Competition
Ianation
fhe nim is ln equilibrium at point "E". Oe is the equilibrium quaniity wn
,j
Here-
,
l.
'
AC ='fG
Outpui - OQ
TC = (AC)
TC = (TC)
:tlC =
AR=EP
Ourplr = OQ
TR = (EP) (Outpu0
TR = (EP) (OQ)
TR = OQEP
(Outpuo .
(OQ)
OQTG
.
Profir =n-TR-TC
= oQEP
LOSS = TCEP
OQTG
JAC
JAva
k?r
x.
Rc!ennt)
(x-a'^41r
old
ot\,
p*,r
anation
nauon
Po,r
The firm is in equilibrium at point "E". OQ is tlre equilibrium quantity while
is the equilibrium price.
Here
'
AR=EP
AC = Ctl
OutPUt = OQ
Ootput
TR
TR
TR
TC = (AC) (Ourput)
TC = (GH) (OQ)
TC = OQGH
Prolir=|l=TR-TC.
=
=
=
=
OQ
(EP) (Output)
(EP) (OQ)
OQEP
= oQEP - OQGH
- CHEP)
loss of the firm is GHPE. The fitm is on shutdown point, The amount of loss
s the same, weather it operates or not. However, if price further ialls, the
must close down. Therefore it is better to shutdown and wait for some qood"4LOSS
.'-l
,i
i
l
,,l
i'f
'I
"; '
,i
)r
-Ih
rurR
"Long run is a tirne period in
which a firh can chanEe iG
Fi'-:df,.l Faetols as well as
case
, scime of the existing firms leave the industry, AR curves shifts upward.
s situation losses will convert into hormal profit. It concludes that under
competition a firm will earn only normal profit. This can be explained with
help of following diagram.
orarn
LM.
(Y-1i^j!,
't,,l+
.+
P/
A<'= t4Q-l
A(. m(
QeventJo
Ae'= v1ft"
cost and
eS are taken on y.axis. At point "E" firm faces the equilibrium situation
necessary and sufficient conditions are satisfied.
.
i. LlvlC = MR
LMC is cutting MR from below
point E'firm is eaming supernolmal proflt. Ndw firms enter into the industry,
ce falls from P'to P and AR curves shifts downward from AR'to AR. At point
lfirm is facing losses. Due to loss some firms exit from industry. As a reslrlt
icd level increases and AR curve shifts upward from.AR" to AR.
ii.
re
AR=EP
LAC = EP
OutPUr = OQ
'
Outp,,rt = OQ
TC = (LAC) (Ourpu0
TC = (EP) (OQ)
TC = OQEP
TR = (EP) (O0rpur
TR = (EP) (OQ)
TR = OQEP
TR=TC=OQEP.
]],lJ::lii.-.-.
,.
+'u
Ll
{J;\
,,:Li/
.1; Lr.6g;)
r(:.
'(:
:'- t^L
::
-i
r_.
r:
el
))
d.'d,
Monopoly
,,/
lFYULJ. "
ne monopoly. Explain equitibrium of a lirm under monopoly in short
4!
long
ANSWER.
opoly
'Monopoly
gle seller
1) single
single seller controls the whole market. ThF Single seller may De an
trairiaii gi"rp ;puti""", -tpotuti""t or the sta6'
close substitute
2) No
' -rn"i"
it
rr
similar good.
.]ew lirns
sl'ong ba(riers fo.
4)
to
change in price is
rev(
Necessary condition
PIC
II.
EXI
MR
Sufficientcondition
NlC
iagram (y-a i)
5ML
2)l
Lq,+
equ
?.
Reteqle!
Explanation
A<
-q--.1111-ote,rr
Dia
rx-q"-isr
while price',cost
the above diagram output is measured along x-axis
where both
g. l-"u"nr", ui" taken on y:axis. Equilibrium takes place at point "E"
equil'br;um
i"
the
OQ
There o e
i"."rru* unO sLificient co'rdr.ions are fulnlled
pr'ce'
quanf'fy w\ile OP wil' corsider as equ l'oridm
ir
/)-l
cB
sho!-t run
,'Short
IVlonopoly
in
its
urd,i,
ll
T.":^T:ly
,n"l-"
variable iactors ot
i:T'ii;fl,iupernormal
3)
Normal loss
revenueS
?
s
'l<e.{e}u^e,3
-D
EXptanattori
dp"g.
(x-qx;s,
AR=TP
Outpur = OQ
._
Outpur = OQi. \
TR = (Tpj (Ourpur)
rC = (AC) (ourput)
rc
= (RS) (OQ)
TC = OeRS
Profir=I1=TR-TC
TR = (rP) (oQ)
TR = OQTP
4. T=oQTP_oQRs
' II = TPRS
Normal piofit
Fi.m will earn normal profits when total
revenues and totai costs are
,"o'. _, .
(TR = TC)
,_, lh,r.un be explained Lrith lhen hetp ol o;dgrd-n.
Diagram
'
I
Y-o!i!/
C6rf
t-
Q..,^oo
(x-q.ar r
[lonoP6lY
nauon
The firm is in
equiLlbriurn
AR=TP
AC=TP
Oulput = OQCp,
TC = (AC) (Ourput)
TC = (TP) (OQ)
TC = OQTP
Output OQ
=
TR = (AR) (Outpr.rt)
TR = (TP) (OQ)
TR = OQTP
TR=TC=OQTP
Firm will face loss when total revenues are less than total costs
'
(TR <Te)
witn then help of diagcam
can
be
exp'ained
Th:s
(Y-q s,
Unc
exp
cq,l
.!,
P-cren ,s.l
nu+oui'
anation
The firm is in equilibrium at point "E". oQ is the equilibrium quantity while
is the equilibrium Price.
Here-
AR=TP
AC=GH
- OQ
TR = (TP) (Output)
TR = (TP) (OQ)
TR = OQTP
Outpur
Output = OQ
TC = (AC) (Output)
rc = (cE) (oQ)
TC = OQGH
Profit=n=TR-TC
= OQTP - OQCFI
I-oSS = GHTP
r::t---:(
,Ls
I
I
l'4onopoly
lrng run
Equi[it
cohdltjo.frs
ri lrrn
'
i.
LMC
ii.
l4R
slfficimt condition
'
urrder monoJoly a firm will earn supernotmal prolll in long run. This cdn be
explained with the help of di"grdm.
Piagrar-n
Cu*
&
(Qeve ru,terr
!fx-c\,i1,)
Explanation
ql1ipulr
Here
AR = 'l-P
46=RS
Output = OQ
TR = (TP) (Output)
TR = (TP) (OQ)
TR = OQTP
Output = OQ
TC = (AC) (Oulpuo
TC = (RS) (OQ)
TC = OQRS
Profit=
= TR-TC
N = OQTP._ OQRS
= rpRS_)