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Perfect Competiton

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4 views

Perfect Competiton

Uploaded by

dainty_swweet
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Concept of Revenue

o Total revenue of a firm is the selling price


(P) times the quantity (Q) sold.
TR = (PQ)
o Average revenue: Total revenue (PxQ)
divided by the quantity (Q) sold. It is the price
of the product at which it is sold.

o Marginal revenue: The change in total


revenue from an additional unit sold.
MR =TR/ Q

1
Concept of Cost

Total Cost is the sum of all cost incurred in the


production
TC = TFC + TVC

Total Cost = Total Fixed Cost + Total Variable Cost

2
Average Cost: Total cost divided by the total
output. It refers to the cost per unit of output.
AC = TC / Output
AC = AFC + AVC

Marginal cost: The change in total cost from an


additional unit produced.
MC =TC/ Q
AC and MC curve

AC ,
MC

Output
Profit = Revenue - Cost
Classification of Market

Markets Form
Perfect Imperfect
Monopoly
Competition Competition
Monopolistic
Competition

Oligopoly

Duopoly
Meaning of Perfect Competition Market

“A Market situation in which a large number of


producers or sellers producing and selling
homogeneous product.”
Main features of Perfect Competition Market

Large no. of buyers • Each sellers sell a small portion total


• Single sellers has no influence on market
and sellers • Sellers are price taker

Homogeneous • Identical product


product • Same price and cost

Free entry and • There is no government or other control


exit
Main features of Perfect Competition Market

Perfect knowledge • Perfect knowledge about the prevailing price.


about market

Absence of selling • Large no. of firm, so no transport or selling


cost and Advt. cost
• Homogeneous product, so no advt. needed
cost

A single price of • Price is determined in the industry .


product

Example: Agricultural products


Meaning of Perfect Competition Market

Nature of demand and AR, MR Curve of a firm

Out put Price TR AR MR


1 10 10 10 10 AR, MR Curve of a firm
2 10 20 10 10
3 10 30 10 10
Price
4 10 40 10 10
5 10 50 10 10 Price=AR=MR
6 10 60 10 10
7 10 70 10 10
8 10 80 10 10 Output
Meaning of Perfect Competition Market

Price determination in the industry

Excess supply

Supply Curve

Price

Demand Curve
Excess Demand

Output
Meaning of Perfect Competition Market

Price determination in the industry

Industry Firm ( is a Price Taker)

Supply Curve

Price Price

Price=AR=MR

Demand Curve

Output Output
Short run Equilibrium of the Firm
1. Total revenue and Total Cost Approach

Maximum Profit

Break even
point

Profit
curve
2. Marginal revenue and Marginal Cost Approach
The firms equilibrium(Out put determination)
 First Condition for maximization of profit is MR= MC

 Second Condition for maximization of profit is MC curve cut MR curve


from bellow

Industry Firm ( is a Price Taker)

Supply Curve
MC
Price Price
MC=MR
Price=AR=MR
E0 E

Demand Curve

O M
Output Output
Meaning of Perfect Competition Market

Short run equilibrium of a firm with Super normal profit

MC
Price AC
MC=MR
Price=AR=MR
Profit E

O M
Output
Meaning of Perfect Competition Market

Short run equilibrium of a firm with normal profit

MC
Price AC
MC=MR
Price=AR=MR
E

O M
Output
Meaning of Perfect Competition Market

Short run equilibrium of a firm with Losses

AC

MC
Price

Losses Price=AR=MR
E
MC=MR

O M
Output
The Shutdown Decision

• The shutdown point is the P


point below which the firm MC
will be better off if it shuts
down than it will if it stays
in business ATC
• If P>min of AVC, then the
firm will still produce, but
earn a loss AVC
• If P<min of AVC, the firm PShut P = AR = MR
will shut down down

• If a firm shuts down, it still


has to pay its fixed costs Q
Q
14-23
Meaning of Perfect Competition Market

Long run equilibrium of a firm with Normal Profit

LMC
Price LAC
MC=MR
Price=AR=MR
E

O M
Output

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