Page 1 : Chapter-10, The Theory of Firm, Under, PERFECT COMPETITION, ©
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Page 2 : Forms of Markets, , Perfect Competition, , Imperfect Competition, , Monopoly, Monopolistic Competition, , Oligopoly, ©
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Page 3 : PERFECT COMPETITION, Perfect Competitive Market is a market situation, which, fulfils the following conditions or assumptions., 1.Large Number of Buyers and Sellers, 2.Homogeneous products, 3.Freedom of Entry and Exit, 4.Perfect Knowledge about Market Conditions, 5.There is no selling cost., 6.Perfect Mobility of Factors of Production, 7.No Transportation Cost, 8.Uniform Price, , ©
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Page 4 : LARGE NUMBER OF BUYERS AND SELLERS, , There are large numbers of buyers and sellers for a, commodity in this market. Each one of them is too small, relative to market that it can exert, , no perceptible, , influence on price., , ©
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Page 5 : HOMOGENEOUS PRODUCTS, , All firms produce homogeneous products. As a result,, the buyers cannot distinguish between the product of one, firm and that of another, , ©
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Page 6 : FREEDOM OF ENTRY AND EXIT, , New firms have absolute freedom to enter in to the, industry and leave from the industry., , ©
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Page 7 : PERFECT KNOWLEDGE ABOUT, MARKET, , Buyers and sellers have perfect knowledge about the, price of the commodity. Therefore, advertisements become, unnecessary. There is no Selling Cost, , ©
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Page 8 : PERFECT MOBILITY OF FACTORS, , Factors of production have perfect freedom to move in, to better paid industries, , ©
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Page 9 : NO TRANSPORTATION COST, , As Goods are produced at a particular place,, there is no transportation cost., , ©
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Page 10 : UNIFORM PRICE, , Since there is no transportation cost the, commodity have same price everywhere in the, market, , ©
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Page 11 : REVENUE CURVE UNDER PERFECT, COMPETITION, In perfect competition, a firm can sell as many unit s of a, commodity as it desires at the fixed price. Since additional, units are sold at the same price, firm’s average and marginal, revenue become equal. The corresponding AR and MR, curve is one and is a straight line parallel to X-axis., THUS UNDER PERFECT COMPETITION AR=MR= PRICE., ©
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Page 14 : PROFIT MAXIMISATION, A firm produces and sells a certain amount, of a good. The firm’s profit, denoted by π and, is defined to be the difference between its total, revenue (TR) and its total cost of production, (TC)., , In other words π = TR – TC, ©
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Page 15 : AT WHAT OUTPUT LEVEL IS THE, FIRM’S PROFIT MAXIMIZED?, There are three condition for short run profit maximisation, , 1.Price = Marginal Cost at Q, 2.Marginal Cost Is Non Decreasing at Q, 3.Price f AVC at Q In Short Run, , ©
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Page 17 : SUPPLY CURVE- SHORT RUN, In the short run price must be greater than, or equal to minimum of AVC curve therefore, the supply curve of a firm in the short run is, upward sloping portion of SMC above the, minimum point of AVC. The supply curve of a, firm in the short run is less elastic and it is, responsive to changes in price., The rising portion of marginal cost, curve is the firm’s supply curve., ©
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Page 19 : SUPPLY CURVE- LONG RUN, In the long run price must be greater than or, equal to minimum of LAC curve therefore the supply, curve of a firm in the long run is upward sloping, portion of LMC above the minimum point of LAC, Curve. The supply curve of a firm in the long run is, highly elastic and it is more responsive to change in, price, ©
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Page 21 : SHUT DOWN POINT, In the short run the firm will shut down if it cannot, cover average variable costs. That is the firm will, continue to produce as long as price is greater than, average variable cost., Once price falls below that point it makes sense to, shut down temporarily and save the variable costs., The shut-down point is the point at which the firm, will gain more by shutting down than it will by staying, in business., , ©
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Page 23 : THE BREAK - EVEN POINT, The point where total cost of production equal, to total revenue is called Break - Even Point. At, this point, the producer will have neither profit, nor loss. The revenue will just cover the, expenses. That is, the producer is getting Normal, Profit. The following table and diagram will, explain the Break-Even Point., ©
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Page 25 : THE BREAK - EVEN POINT, In the above figure, point E is the Break –, Even point. At this point, total cost of, production equal to total revenue To the left of, point E the cost exceeds hence the producer is, looser, to the right of point E revenue is more, than the cost, and hence the producer is gainer., ©
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Page 27 : FACTORS AFFECTING FIRMS, SUPPLY CURVE, 1.TECHNOLOGICAL PROGRESS, The technological progress affect the supply, curve of a firm will shift to downward (to the, right). Because a firm can produce same level of, output using less of inputs with improved, technology., Marginal cost fall due to the technological, progress., ©
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Page 28 : FACTORS AFFECTING FIRMS, SUPPLY CURVE, 2. UNIT TAX, A unit tax may be defined as the tax, imposed by the government on per unit sale of, output. The imposition of a unit tax shifts the, marginal cost curve of the firm upward., Thus imposition of a unit tax shifts, supply curve to the left., ©
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Page 29 : FACTORS AFFECTING FIRMS, SUPPLY CURVE, 3. PRICE OF AN INPUT, , An increase in the price of an input, will shift the marginal cost curve, upward. So the supply curve shifts to, the left., Therefore, an increase in the input, price negatively affects the supply of the, firm., ©
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Page 30 : FACTORS AFFECTING FIRMS, SUPPLY CURVE, 4. INCREASE IN NUMBER OF FIRMS, If number of firms increase in a market, the, market supply curve will shift to the right, as there will be more number of firms supplying, more amount of output, , ©
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