DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : A.Satya Vani Kumari
Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Poly. For Women, SURYAPET
Year/Semester :III Year / V Semester
Subject : Business Economics –I
Subject Code : CCP-502
Topic : Markets
Duration : 50 Mts.
Sub Topic : Determination of Short-run & Long-run

equilibrium of the industry under perfect

competition.
Types of competition and business practices
Teaching Aids : Power point, Animation
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Objectives

On completion of this period you would be

able to:

 Determine short-run & long-run equilibrium of the

industry under perfect competition
 Explain the Types of competition and Business
Practices

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Recap

In the previous class we have discussed about :

 Profit maximization under perfect competition

 Determination of short-run & long-run equilibrium of

the firm under perfect competition

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Short Period Equilibrium of the
Industry
Conditions for short period equilibrium of the
industry:
2. The firms in the industry have no tendency to
change the output.

4. All the firms must be producing equilibrium level of

output.

6. The firms with Normal profits and Super normal

profits and maximum losses can co-exist in the
industry.
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4. The short period market price and its determining
factors namely short period demand and supply
should be in equilibrium.

(Represented in Fig. 12 )

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 E: equilibrium
(B) Panel: Profit PEAB
Fig 12 Industry
and Firm’s  SAC< AR
Equilibrium (C) Panel: Loss PELS
SAC>AR
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Graph Explanation

 SS is industry’s short-run supply curve

 DD is industry’s short-run demand curve

 Both ‘SS’ and ‘DD’ intersect at ‘E’ , when the

price is ‘OP’

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 ‘OQ’ is level of output at which the quantity
demanded and supplied are equal.
 Hence, at this price, the industry is in equilibrium.
 The firms are also in equilibrium by equating MR &
MC.
 But at this price, the firms may get profit or loss.
(As shown in Fig.12 (B) & (C)

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Long Period Equilibrium of the
Industry
Conditions for long period equilibrium of the
industry:
2. All the existing firms in the industry must be at
equilibrium level of output by equating LMC =
LMR.

4. The industry should not allow entry or exit of firms

into the industry that means, the number of firms
should be stable.
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 Stability in the number of firms exist when all the
firms get normal profits. This happens when all the
firms have price or LAR = LAC.

3. The quantity demanded and supplied should be

equal.

(Represented in Fig.13)

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Fig.13 Industry and Firm’s Equilibrium in the
Long Run
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Graph Explanation

1. As shown in Fig. 13(A) ‘OP’ is long-run price at

which long-run demand and supply are equal.

3. As shown in Fig. 13(B) , at the price OP, the firm

is also in equilibrium by equating LMR = LMC.
So, ‘OM’ is the equilibrium output in the long-run.

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 The inefficient firms having higher costs as
shown in Fig.13 (B) where Price = LAC have to
quit the industry.

 The price taking firms, whose LAC is at

minimum can attain long-run equilibrium.

 So, long-run price = LAR = LAC = LMR = LMC.

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Types of Competition & Business
Practices
Different types of competition are:

3. Potential Competition
4. Effective Competition
5. Cut-throat Competition and
6. Unfair Competition

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1.Potential Competition
 Allows free entry of firms.
 Exists because of Science, Invention and
Technological Advancement etc.
 Restrains over-charging the customers and
underpaying for raw-materials.

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Factors Weakening Potential
Competition
 Exclusive ownership of scarce resources

 Need for huge investment

 High transportation costs / tariffs etc

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2.Effective Competition
It is more realistic and practicable.

Requisites for Effective Competition:

 Existence of many sellers
 Availability of ready substitution
 Market Information
 Independent action of each firm in policy decisions.
In the absence of above requisites, effective
competition can not exist.

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 3.Cut-throat Competition
 It exists because of idle or excess capacity of
fixed factors

 The firms may resort to cut prices

 It benefits none

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 4.Unfair Competition
It exists when business men resort to unfair
tactics to seize the market like:
 Taking customers away from a rival
 Defaming the rival’s products
 Stealing trade secrets from rivals
 Involving the rival in a false litigation, etc

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Summary
In this class we have discussed about:

 Determination of short-run & long-run equilibrium

of the industry.
 Types of competition.

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Frequently Asked Questions

1. Write the features of perfect competition and

price determination under perfect competition
with graphical representation.

3. Explain how short-run and long-run equilibrium

of firm and industry under perfect competition
are determined with graphs.

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