Equilibrium of Firm in Perfect Competition: Short & Long Run Analysis
Explore the equilibrium of a firm under perfect competition in both short and long run scenarios. Understand the conditions for equilibrium, including profit levels and cost considerations. Discover the key features of perfect competition that drive market dynamics.
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COURSE: B.Sc. (PROGRAMME) IN ECONOMICS PAPER NAME MICROECONOMICS II TOPIC EQUILIBRIUM OF FIRM UNDER PERFECT COMPETITION YEAR- THIRD SEMESTER-5 SESSION -2022-2023 DATE OF LECTURE: 29/07/2022 PREPARED BY DR. KAMALIKA CHAKRABORTY ASSISTANT PROFESSOR (DEPARTMENT OF ECONOMICS) KHATRA ADIBASI MAHAVIDYALAYA, BANKURA, WEST BENGAL
Features of Perfect Competition A Large Number of Buyers and Sellers Buyers and Sellers are Price Takers Homogeneous Products The firms are Free to Entry or Exit the industry No Individual Preferences (buyer/seller) Each buyer and seller operates under the conditions of certainty Mobility of Factors of Production factors move freely from industry to industry and firm to firm Buyers and sellers have perfect information about the market There are no transport costs and advertisement expenditure
Short run Equilibrium of firm under Perfect Competition Conditions for equilibrium of the firm are: i) P=MC ii) MC must be rising at the point of equilibrium In short run firm may earn supernormal profit (Total Revenue > Total Cost), Normal Profit (Total Revenue = Total Cost) or incur loss (Total Cost> Total Revenue).
Short run Equilibrium of firm under Perfect Competition(contd.) Fig 1: Short run Equilibrium with Supernormal Profit Fig 2: Short run Equilibrium with normal profit Fig 3: Short Run Equilibrium with Losses
Long run Equilibrium of firm under Perfect Competition In the long run only those firms will remain in the market who earn normal profit. Each firm of the industry will be in equilibrium if the following two conditions are satisfied: (1) In equilibrium, its short-run marginal cost (SMC) must equal to its long-run marginal cost (LMC) as well as its short-run average cost (SAC) and its long-run average cost (LAC) and both should be equal to MR=AR=P. Thus, the first equilibrium condition is: (1) SMC = LMC = MR = AR = P = SAC = LAC at its minimum point, and the second equilibrium condition is (2) LMC curve must cut MR curve from below.
Long run Equilibrium of firm under Perfect Competition(contd.) Fig 4: Long Run Equilibrium of Firm
