BCom Notes Part I Economics Market Forms
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Market Forms
Qs. What do you understand by Perfect Competition? State and Explain the essential conditions or Characteristics of Perfect Competition?
Perfect Competition
A market is a set of condition in which buyers and sellers exist involves to exchange goods.
A market is said to be perfect competition of following characteristics exist in the market.
1. Large number of buyers and sellers.
2. Homogenous products.
3. Free entry on exit.
4. Perfect Knowledge.
5. Absence of Transport.
6. Perfect Mobility of the factor of production.
Price are fixed in the market due to large no sellers. If any one low their price all have must to low their price but if any high their price will alone himself and consumer do not go to him.
Qs. Distinguish between Perfect and Imperfect Competition.
Perfect Competition
If in any market the large number of seller and buyers free entry and exist in the market, Homogenous product, the market is called Perfect Competition Market.
Imperfect Competition
It is different then perfect competition market in this market
- the number of sellers are few
- the product are not homogenous
- same price do not exist in the market.
Monopoly
Characteristics of monopoly market .
- Single Seller
- Price Discrimination
- Homogenous Product
- No entry of New Seller
- Monopolistic Competition
- Monopolistic competition exist when following characteristic found.
- Many Seller
- Free entry in the market
- Prize change to capacity of seller
- Differentiate Product.
Oligopoly
- Following are the Characteristics of Oligopoly.
- Few seller (may be three, four etc).
- Homogenous product (Cement).
- Free entry in the Market.
- In Oligopoly market only 2 sellers in the market and Homogenous product with price differentiate.
Qs. Explain with the help of diagram a Firm’s Equilibrium condition in short run under perfect competition.
OR
What do you understand by Firm’s Equilibrium? What are the conditions of this equilibrium?
OR
A firm is in equilibrium where its marginal revenue is equal to its marginal cost. explain.
A firm is at equilibrium when there marginal cost (MC) is equal to Marginal revenue (MR). At this point they are not able to change there level of output. At equilibrium position firm gets maximum profit.
Firm’s Equilibrium in the Short Run Under Perfect Competition
As we see that under perfect competition demand curve is perfectly elastic due to fixed price. The firm’s changes the variable factors in order evaluates extra cost incurred on producing extra unit (MC) and also looking for the scale of extra unit of production (MR)
MC curve must cut MR curve from below:
These conditions shows the firms maximum profits or minimum losses, but they do not shows firms absolute profit and loss position.
In short run under perfect competition there are three possibilities.
A. When a firm is making super normal profits in the short run.
B. The firm making just normal profits in short run.
C. The firms incurring losses in the short run but does not close down.
D. A firm minimizes losses by shutting down.
1. Profit Maximizing Position
In short run when market price exceeds the short run average total cost (SATC) the firms got maximum profit.
Under Perfect Competition firms can not be able to influence the price that is why effect price takes. Therefore AR or demand curve and MR would coincide with each other under perfect competition.
OP —-> Price Prevailing in the market.
PD —-> Both AR and MR curve.
MC —-> Marginal cost curve.
Firms get maximum profit where MC cuts MR (<= MR = MC) and MC cuts the MR from below.
Now we see that MC cuts MR at two points T and R. Where at T, MC cuts from the above so it is not our equilibrium point while at R,MC cuts from the above so that is our equilibrium position. Hence,
MC = MR = Price
Where,
OP —-> Market Price
R —–> Firms equal point
Where MR = MC
ON —-> Quantity produce at eq.
The inter section of MR and MR, set the quantity of good the firm will produces.
OPRN —-> The total revenue at equal position.
OKMN —-> The total cost of producing ON at eq.
KPRM —-> The firm earning super normal profit.
2. Zero Profit of a Firm
In short run a firm may be making zero profit are economic profit.
OP —-> Market Price
PD —-> AR and MR curve
R —–> Break even Point
at Break even Point (R)
MR = MC = ATC
OPRM —-> Revenue and cost of the firm
At break even firm get economic profit mean zero profit at this point firms suffer in the market.
3. Loss Minimizing Case
The firm in short run is minimizing losses if the market price is smaller than ATC but large than AVC.
OP —-> Market Price
N —–> Firms eq. point where MR = MC
OPNK —-> Total Revenue
OTSK —-> Total Cost
PTSN —-> Firm is suffering a net loss equal to shaded area.
4. Short-Run Shut Down
In short run price takes firm minimizes losses by closing it down if the market price is smaller than AVC.
Where,
OP —-> Market Price
Z —–> Eq.Pt where MR = MC
OK —-> Output produced by firm at Z
OPZK —-> Total Revenue
OTFK —-> Total cost
PTFZ —-> The firm suffering net loss of total fixed cost.
If price is falls below Z, firm is minimize it losses or better to closing down in short run.
Qs. Examine the Equilibrium of a firm under perfect competition in the long run.
OR
Explain why a firm earns maximum profit when MR = MC
OR
What is perfect competition? Show how in a perfectly competition equilibrium the price of a commodity is equal it its marginal and average cost of production.
Firms Equilibrium in the Long Run
The long run is a period during which firms can be able to change there fixed cost as well as variable cost.
In long run there is a possibility of entry of new sellers.
In this regard the long run refers to a situation where free and full scope for adjustment has been allowed to economics forces.
In long run all cost are variable
AC and MC curves makes the decision for output.
Under Perfect Competition a firm is in equilibrium when price is equal to MC and AC.
If P> AC firm will get supernormal profit, so there is a chance of entry of new firm in this case due to extra ordinay profit.
Due to entry of new firm output increase so price will be decline until all firms earning normal profit.
There are two conditions must have to satisfy under perfect competition long run equilibrium.
Price = Marginal Cost
Price = Average cost.
i.e. P = MC = AC
Where,
R —-> Shows firms equilibrium in long run at Price P —-> MR = AR = P
M —-> Best level of Output at equilibrium
OPRM —-> Total Revenue
At price P, there is no tendency for the new firms to enter or leave the industry.
If Price increase from P to P1 the firm will get more than normal profits and new firms attract due to higher price. So price will go down again. Similarly of price goes down so due to which firms get loss and some of them quit from the market there for supply decreases and therefore price rise up to P. again.
Qs. What do you mean by equilibrium of an industry. State and explain the condition of this equilibrium under perfect competition.
OR
Can a firm earn more than normal profit in the long run? Explain.
Meaning of Equilibrium of Industry
An industry is said to be equilibrium when there is no tendency for its output to increase or decrease. This equilibrium help to determine price. In equilibrium there is no tendency to entry or exit of the firm
Conditions of Equilibrium
A industry is in equilibrium if they satisfied with two conditions.
1. All firms in the industry should be in equilibrium. A firm gives output at which where MC = MR and MC curve cuts MR curve from below.
2. Whole industry in equilibrium means there is no tendency for the firms entry or exit. It occur when all firms get normal profits which is enough to stay in the market.
An industry will be earning normal profit if the price (AR) is equal to average cost (AC) if P > AC firms get super normal profits, so the new firm offered in the industry.
If P < AC, the profit is less than normal profit so many be some firm leaves the industry.
So we get two necessary condition for equilibrium in the industry.
i MR = MC and
ii AR = AC
Equilibrium in short run is really possible in industry but in long run they should have to achieve equilibrium.
Hence, only in long run an industry affair equilibrium because all factors of production have full scope for adjustment.
Qs. What are the salient features of perfect competition? How is price determined under perfect competition.
OR
Explain the term “Equilibrium”. How is prices determined under perfect competition.?
Cost of production is very important for determining price.
The demand of all consumers and supply of all firms together determines the prices.
In perfect competition market their is importance of force of demand (MU) and the force of supply (i.e. lost of production)
Equilibrium Price
As we know demand curve is normally slopes downward to the law of demand if price decreases demand increases or if prices increases demand decreases. While the supply curve is normally sloped means supplier supply more at higher price.
Equilibrium occur in the market when demand and supply are equal.
Equilibrium is not occur suddenly it takes some time and up and downs in price. From equilibrium of price falls the quantity demanded increases but supply falls. Similarly of price rise the demand decrease and supply increase.
We analyze that price is determine in the market when market is in equilibrium means demand and supply are equal.
Equilibrium price charges if demand or supply change.
Thus we analyze that factors like cost of production incomes of the consumers and size of the population take point in determining price they all shows by supply and demand.
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