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Chapter 11 ISC Class 12 Economics

The document discusses the determination of equilibrium price and output under perfect competition, focusing on both short-run and long-run scenarios. In the short run, firms are price-takers and can earn super-normal profits, normal profits, or incur losses, while the long-run equilibrium occurs when firms earn only normal profits with conditions of free entry and exit. Key equilibrium conditions include SMC = MR in the short run and LMC = MR = AR = LAC in the long run.

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1K views4 pages

Chapter 11 ISC Class 12 Economics

The document discusses the determination of equilibrium price and output under perfect competition, focusing on both short-run and long-run scenarios. In the short run, firms are price-takers and can earn super-normal profits, normal profits, or incur losses, while the long-run equilibrium occurs when firms earn only normal profits with conditions of free entry and exit. Key equilibrium conditions include SMC = MR in the short run and LMC = MR = AR = LAC in the long run.

Uploaded by

harshvmishra80
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DETERMINATION OF EQUILIBRIUM PRICE AND OUTPUT UNDER

PERFECT COMPETITION

PRICE AND OUTPUT DETERMINATION UNDER PERFECT


COMPETITION

Short-run Equilibrium
A firm is an individual enterprise. An industry is a group of
competing firms selling a well-defined product.

Equilibrium of the Industry/Price Determination: Under perfect


competition, no single firm or single consumer can influence the
market price because of its negligible share in total supply or
total demand of the industry.

Equilibrium of the Firm in the Short-run: A firm under perfect


competition cannot influence the market price. The firm is a price-
taker. It takes the price as given. The individual firm in perfect
competition is assumed to be facing a perfectly elastic demand
for its product.

In order to determine the profit-maximising output, the firm has to


meet two types of equilibrium conditions.

(i) First condition for equilibrium of the firm in the short-run is


that it must ensure that SMC = MR, and SMC curve cuts the MR
curve from below.
#SMC = P. This is the profit- maximisation rule.
(ii) It is possible that a firm under perfect competition, while
maximising its profits, may in fact be earning super-normal
(abnormal) profits, incurring losses or just earning normal,
profits.

Thus, short-run equilibrium conditions of a firm are:


1. SMC = MR
2. AR </> SAC

Three possible Equilibrium positions in the Short Run are :


i) Firm making supernormal profit
ii) Firm making normal profit
iii) Firm incurring loss

Supply Curve of the Firm: The quantity which a firm is willing to


supply at a particular price is determined by the equality of SMC
and MR (= AR = P).

Shut-down point is the situation where the firm covers only


variable cost, i.e., where AR (Price) = AVC .

Break-even point is the point where the firm just covers its cost,
i.e., AR = AC. It is a situation of no-profit-no-loss.

Long-run Equilibrium
In the long-run all the factors are variable. Long-run is variable
plant period. From the viewpoint of the industry, the number of
firms is fixed in the short-run.

Equilibrium of the Firm in the Long-run : -A firm under perfect


competition will be in equilibrium in the long-run when it earns
only normal profits. The key to long-run equilibrium is free entry
and free exit.

There are two conditions which must be fulfilled by a firm to be in


equilibrium in the long-run.

1. LMC = MR (profit-maximisation rule), and also that LMC curve


cuts the MR curve from below.
2. AR = LAC (i.e., normal profits)

The equilibrium condition : LMC = MR = AR = LAC

Long-run equilibrium of the industry - An industry is in the long-


run equilibrium, when two conditions operate:

1. An industry is in equilibrium in the long-run when its market


demand equals its market supply. Graphically, the point of
intersection of the market demand curve with market supply
curve will give the point of long-run equilibrium of the industry.
2. The industry would be in equilibrium in the long-run when it is
neither expanding nor contracting.

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