meaning of perfect competition
Perfect competition is a market situation in which there are a limited number of buyers and sellers. Goods are homogeneous, and buyers and sellers lack complete market knowledge. An overall industry price is set, and all firms must accept that price. Firms can sell any quantity of their product at this price. Therefore, in a state of perfect competition, demand for a product is perfectly elastic.
Meaning of equilibrium of firm and industry
A firm is said to be in equilibrium when it does not attempt to reduce its production quantity. Of course, this situation occurs when the firm is maximizing profits.
Under perfect competition, an industry is a group of firms that produce only one product. An industry is said to be in equilibrium when there is no tendency for the total quantity produced to increase.
According to Prof. Boulding, "An industry is said to be in equilibrium when there is no tendency for it to contract."
According to Prof. Watson, "An industry is in equilibrium in the short run when production is constant, no force acts to expand or contract production. Or if production is in equilibrium, the industry is also in equilibrium."
Thus, there are the following two conditions for the equilibrium of an industry:
1. All the existing firms in the industry are in equilibrium, that is, they are producing their output at a constant rate.
Don't want to increase?
2. New firms may neither want to enter the industry nor may existing firms want to leave the industry.
The first condition is met only when all firms in the industry are in equilibrium. That is, each firm's cost is equal to its marginal revenue (i.e., MC = MR). The second condition is met when all firms are earning at least normal profits.
Having explained the meaning of perfect competition and equilibrium, we will now explain the firm and industry in two timeShort-term equilibrium of the firm and industry: Explain the short-term equilibrium of the firm under the equation
Two different assumptions / Now all factors are homogeneous i.e. when the industry
When the production costs of the two companies are exactly the same.
Under perfect competition, when resources are equal (i.e., when the production costs of all firms are equal), make assumptions.
Let us accept the assumption that all the factors of production are identical, that is, exactly the same. This means that the average and marginal costs of all the firms in the industry are exactly the same. That is, the entrepreneurs are equally efficient. (ii) The factors used by the firms are also similar. All the factors are available to all the entrepreneurs at the same prices. Let us also assume that the firm produces each quantity of output at the minimum cost. Clearly, the costs of the firms will be equal only when all the factors are available.
The equilibrium of a firm in your period can be explained in two ways (i) with the help of total revenue and profit and (ii) with the help of marginal and average profits.
(2) Determination of equilibrium of a firm with the help of total revenue and total cost curves A firm
The firm is in a state of maximizing profits. According to this method, equilibrium will be reached at the point P where the difference between the firm's total revenue (TR) and its total cost is the largest. This can be illustrated by Figure 1.
with the tongue
D
TO
TR
The total cost (TC) and total revenue shown in the figure show that the quantities of production are different for different levels of output. If the firm produces OM1, it will incur a loss because TR < TC. If the firm produces OM2, it will earn zero profit (normal profit), because in this case TR = TC. However, if the firm produces any level between M1 and M2, its profit will be positive. Because TR is 0 at every level of output between point 3 and point C. If the firm produces OM1, its profit will be maximum, since at this level of output the distance between TR and TC is greater than the distances associated with other levels of output. That is, at this level of output, the slope of the TR curved curve is equal. Therefore, the firm will be in equilibrium at OM1. Firm ON will not produce even one and a quarter because the TR and TC curves intersect at point C. Therefore, R = TC, meaning there will be normal profits. If production exceeds quantity OM, then revenue exceeds revenue, meaning TC > TR. In this situation, the firm will incur a loss.
M M
production volume
Figure 1
(i) Determination of equilibrium of the firm with the help of marginal and average curves – In the end under perfect competition, the firm produces
It is in equilibrium at the point where it makes maximum profit. periods – (i) short run and (ii) long run.
0 comments:
Post a Comment