2nd Economics Week 10 Complete

Economics
Week 10:- Market Structure
1. Perfect Competition vs. Pure Competition
2. Different Possibilities of SR firm Equilibrium, Profit Maximization in the Short-run and long-run
3. Monopoly: Short run and Long Run Equilibrium under Monopoly
4. Imperfect Competition: Monopolistic Competition, Price and output determination in monopolistic

competition.
1. Perfect Competition vs. Pure Competition:-

The difference between perfect competition and pure competition is described below:
Under perfect competition the factor of production is perfectly mobile.
In perfect competition the buyers and sellers have the greater and best knowledge about the
availability and the prevailing market conditions
The pure competition factor of production is immobile and cannot move from one industry to
another.
In pure competition the buyers and sellers have do not much knowledge about the market
conditions.
2. Different Possibilities of SR firm Equilibrium,
Profit Maximization in the Short-run and long-run :-
 Different Possibilities of SR firm Equilibrium
Introduction
In a perfectly competitive market, a firm cannot change the price of a product by modifying the quantity
of its output. Further, the input and cost conditions are given. Therefore, the firm can alter the quantity
of its output without changing the price of the product. A firm is in equilibrium when its profits are
maximum, which relies on the cost and revenue conditions of the firm. These conditions can vary in the
long and short-term.
Short-run Equilibrium of a Competitive Firm:
In the short-run, there the following assumptions:
The price of the product is given and the firm can sell any quantity at that price,
The size of the plant of the firm is constant,
The firm faces given short-run cost curves.
In the short-run, the firm cannot avoid fixed costs. Even if the production is zero, the firm must incur
these costs. Therefore, the firm cannot avoid losses by not producing and continues producing as long as
its losses do not exceed its fixed costs. In other words, a firm produces as long as its average price equals
or exceeds its AVC.
 Three Possibilities in Short-run:-
In a perfectly competitive market,
1. A firm can earn a normal profit, super-normal profit, or it can bear a loss.
2. At the equilibrium quantity, if the average cost is equal to the average revenue, then the firm is
earning a normal profit.
3. if the average cost is greater than the average revenue, then the firm is bearing a loss. However, if
the average cost is less than average revenue, then the firm is earning super-normal profits.
 Solved Question on Perfect Competition
Q1. What are the main assumptions under the short-run period of a competitive firm?
Answer: The main assumptions under the short-run period of a competitive firm are:
The price of the product is given and the firm can sell any quantity at that price
The size of the plant of the firm is constant
The firm faces given short-run cost curves
Q2. What are the three possibilities for a firm’s equilibrium in a perfectly competitive market?
Answer: The three possibilities are:
The firm earns normal profits
It incurs losses
It earns super-normal profits.
Q3. What are the main differences between the short run and long run of a firm?
Difference Between Short Run and Long Run are,
 Long-Run
There are both fixed and variable components
Capital is fixed
Firms in an industry are fixed
Factors have time to adjust.
 Short-Run
There are both fixed and variable components
Capital is fixed
Firms in an industry are fixed

There is no option of enough time to adjust.
 Profit Maximization in the Short-run and long-run :-
Short‐run profit maximization:- A firm maximizes its profits by choosing to supply the level of output
where its marginal revenue equals its marginal cost. When marginal revenue exceeds marginal cost, the
firm can earn greater profits by increasing its output. When marginal revenue is below marginal cost, the
firm is losing money, and consequently, it must reduce its output. Profits are therefore maximized when
the firm chooses the level of output where its marginal revenue equals its marginal cost.
4. Monopoly: Short run and Long Run Equilibrium under Monopoly :-
Short-Run Equilibrium under Monopoly :-

A Firm’s Short-Run Equilibrium in Monopoly are
Like in perfect competition, there are three possibilities for a firm’s Equilibrium in Monopoly. These
are:
The firm earns normal profits – If the average cost = the average revenue
It earns super-normal profits – If the average cost < the average revenue
It incurs losses – If the average cost > the average revenue
Normal Profits
A firm earns normal profits when the average cost of production is equal to the average revenue for
the corresponding output.
In the figure above, you can see that the MC curve cuts the MR curve at the equilibrium point E.
Also, the AC curve touches the AR curve at a point corresponding to the same point. Therefore, the
firm earns normal profits.
Super-normal Profits
A firm earns super-normal profits when the average cost of production is less than the average
revenue for the corresponding output.
In the figure above, you can see that the price per unit = OP = QA. Also, the cost per unit = OP’.
Therefore, the firm is earning more and incurring a lesser cost. In this case, the per unit profit is
OP – OP’ = PP’
Also, the total profit earned by the monopolist is PP’BA.
Losses
A firm earns losses when the average cost of production is higher than the average revenue for the
corresponding output.
In the figure above, you can see that the average cost curve lies above the average revenue curve
for the same quantity. The average revenue = OP and the average cost = OP’. Therefore, the firm is
incurring an average loss of PP’ and the total loss is PP’BA. In the short-run, a monopolist sometimes
sets a lower price and incurs losses to keep new firms away.
Summary of Short-run Equilibrium in Monopoly
In the short-run, a monopolist firm cannot vary all its factors of production as its cost curves are
similar to a firm operating in perfect competition. Also, in the short-run, a monopolist might incur
losses but will shut down only if the losses exceed its fixed costs. Further, if the demand for his
product is high, then the monopolist can also make super-normal profits.
Long-Run Equilibrium under Monopoly :-

A Firm’s Long-run Equilibrium in Monopoly
In the long-run, a monopolist can vary all the inputs. Therefore, to determine the equilibrium of the
firm, we need only two cost curves – the AC and the MC. Further, since the monopolist exits the
market if he is operating at a loss, the demand curve must be tangent to the AC curve or lie to the
right and intersect it twice.
There are two alternative cases for the determination of Equilibrium in Monopoly:
 With normal profits
 With super-normal profits
We have not taken the loss scenario here because if the monopolist incurs losses in the long-run, he
will stop operating.
Case 1
The demand curve AR1 is tangent to AC or LAC at point E. Remember, if the demand curve lies to
the left of the AC curve, then the monopolist is unable to recover his costs and closes down.
However, if the AR curve is tangent to the AC curve, then the monopolist can recover his costs and
stay in the market.
Further, note that the perpendicular drawn from point E to the X-axis, the MC curve, and the MR
curve are concurrent at point A.
Therefore, all the conditions of equilibrium are satisfied. The monopolist produces OM quantity and
sells it at a price of EM per unit which covers its average costs + normal profits.
Case 2
The marginal revenue curve MR2 cuts the MC curve from below at point B. The corresponding
height of the AR2 curve is E’M1.Hence, the monopolist produces OM1 quantity and sells it at E’M1
per unit to earn an extra profit of E’B per unit. Being a monopoly, this extra profit is not lost to
competition or newer firms entering the industry.
THE END

2nd Economics Week 10 Complete

Uploaded by

Copyright:

Available Formats

2nd Economics Week 10 Complete

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2nd Economics Week 10 Complete

Uploaded by

Copyright:

Available Formats

Economics

Week 10:- Market Structure

1. Perfect Competition vs. Pure Competition

3. Monopoly: Short run and Long Run Equilibrium under Monopoly

4. Imperfect Competition: Monopolistic Competition, Price and output determination in monopolistic

1. Perfect Competition vs. Pure Competition:-

Profit Maximization in the Short-run and long-run :-

 Different Possibilities of SR firm Equilibrium

Short-run Equilibrium of a Competitive Firm:

In the short-run, there the following assumptions:

The size of the plant of the firm is constant,

The firm faces given short-run cost curves.

In a perfectly competitive market,

 Solved Question on Perfect Competition

The size of the plant of the firm is constant

The firm faces given short-run cost curves

Answer: The three possibilities are:

The firm earns normal profits

It earns super-normal profits.

Difference Between Short Run and Long Run are,

There are both fixed and variable components

Firms in an industry are fixed

Factors have time to adjust.

There are both fixed and variable components

Firms in an industry are fixed

 Profit Maximization in the Short-run and long-run :-

4. Monopoly: Short run and Long Run Equilibrium under Monopoly :-

Short-Run Equilibrium under Monopoly :-

Also, the total profit earned by the monopolist is PP’BA.

Long-Run Equilibrium under Monopoly :-

You might also like