Economics-1

BALLB-207

Unit 3:
Perfect Competition

Ms. Lavi Vats

Perfect Competition
• In economics, perfect competition is a theoretical market structure where
direct competition does not exist between firms or sellers because a large
number of sellers (also buyers) are present in the market that all
simultaneously sell an identical product at the market price. Thus each
seller has a very small share in the market with negligible control over
market prices.
• Perfect competition is considered to be the ideal market scenario as it
allocates the available resources in the most efficient way and thus also
referred to as pure competition.
Features

i. Large no of sellers and buyers

ii. Homogeneous product
iii. Free entry and Exit
iv. Absence of government regulation
v. Perfect mobility of factors of production
vi. Perfect knowledge
vii. Absence of Transportation and Selling cost
Short run equilibrium of competitive firm(TR-TC Approach)

Equilibrium of a firm :

▪ A firm is in equilibrium
when distance between TR
and TC should be
maximum.
▪ Total revenue>Total cost
▪ E is the equilibrium point.
Short run equilibrium of competitive firm(MC-MR Approach)

Conditions:
i. MR=MC
ii. MC must be rising or MC curve
should be upward sloping

Quantity TR TC MR MC

1 10 15 10 15

2 20 27 10 12

3 30 37 10 10

4 40 45 10 8

5 50 55 10 10

6 60 67 10 12
Short run equilibrium of competitive firm(Maximising Profits)

• AC curve of the efficient firm lies

below its AR curve.
• The firm is in equilibrium at point E
where the MC curve cuts the MR curve
from below.
• SUPERNORMAL PROFIT =TR-TC
Short run equilibrium of competitive firm(Minimising losses)

• Total losses=TC-TR
• If the AC curve of the firm lies
above the AR curve ,the firm will
suffers losses.
Short run equilibrium of competitive firm(earning only normal
profit)

• E is the breakeven point.

• The competitive firm in equilibrium
always choose the output for which
price(AR=MR)=MC is above the level
of AVC.
Short run supply of a competitive firm

▪ The point as which the firm just covers its

variable cost of production is called shut
down point.Given u shaped cost curves,it is
the minimum point of AVC .The
corresponding price/output is called shut
down price/output.
▪ Competitive firm’s supply curve is that
portion of short run MC curve,which lies
above AVC curve.It is derived by joining
the point of intersection of MC curve with
successive individual demand curve.
Long run supply of a competitive firm

▪ The portion of LMC curve of a

competitive firm above its lac curve is
its long run supply curve.It is derived
by joining together the points of
intersection of LMC curve with
successive demand curves of the firm
as the market price of the product
under consideration keeps rising above
its AC.
Short run equilibrium of competitive industry

▪ The equilibrium price,each firm is

equal to aggregate supply is called
short run normal price.
• The competitive industry attains its
equilibrium in the short run when all
firms present theirin attain their
respective equilibrium positions in the
short run.It io immaterial,whether they
enjoy profit or suffer losses or get only
normal profit.

Industry Firm(profit) Firm(losses)

Long run equilibrium of competitive industry

The Long run equilibrium of competitive

industry is attained,when all firms are in
long run equilibrium in the sense that there
is neither a tendency for the new firms to
enter the industry nor for the existing
firms to leave it.Each such firm earns only
normal profits and has identical cost
curve.