Equilibrium Of Firm In Short-Run Under Perfect Competition

by • 02/07/2011 • B.COM PART 1 EconomicsComments (1)1533

Short run is a period in which variable factors like labor can be altered while fixed factor can not be changed. In short run two costs exist, that is variable and fixed cost.

A firm faces three different types of situations in short-run under perfect competition.

SUPER NORMAL PROFIT/ ABNORMAL PROFIT :

In the condition of super normal profit average total cost ATC is lower than the market prices and the gap between ATC and market price represent profit area.

Super normal profit can be explained with the help of diagram.

In the above diagram x-axis represent the total output of the firm while revenue and cost are marked on y-axis. We can extract the following from the diagram:

  • OM       = Output of firm
  • OP        = Price per unit received by selling the units.
  • OT        = Cost per unit
  • OTQM  =Total cost
  • OPEM  = Total revenue
  • Profit    = Total revenue – Total cost
  • Profit    = OPEM – OTQM

Profit Area = TPEQ

Point “E” showing the equilibrium point where MC cuts marginal revenue and average cost curve from below. We can say that in this condition (TR > TC) total revenue is greater than total cost.

CONDITION OF LOSSES:

Under the condition of loss, the average total cost ATC is greater than market price and gap between ATC and market price represents losses.

The position of firm’s loss can be illustrated with the help of diagram.

In the above diagram x-axis represent the total output of the firm while revenue and cost are marked on y-axis. We can extract the following from the diagram:

  • OM       = Output of firm
  • OP        = Price per unit received by selling the units.
  • OT        = Cost per unit
  • OTQM  =Total cost
  • OPEM  = Total revenue
  • Profit    = Total cost –Total revenue
  • Profit    = OTQM – OPEM

Profit Area = PTQE

Point “E” showing the equilibrium point where MC cuts marginal revenue and average cost curve from below. We can say that in this condition (TC > TR) total cost is greater than total revenue.

NO PROFIT/ NO LOSS OR NORMAL PROFIT

In this condition firm gets normal profit or no profit no loss or at break even point.

Because firm’s total cost is equals to firm’s total revenue.

We can explain this condition with the help of diagram.

In the above diagram x-axis represent the total output of the firm while revenue and cost are marked on y-axis. We can extract the following from the diagram:

  • OM       = Output of firm
  • OP        = Price per / Cost per unit.
  • OPEM  = Total revenue/ Total cost

Total cost = Total revenue

Or

No Profit  No Loss

 

 

Point “E”, showing the equilibrium point where marginal cost cuts marginal revenue from below.

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One Response to Equilibrium Of Firm In Short-Run Under Perfect Competition

  1. Evahan Nyatanga says:

    Thank you so much. This is the clearest and most simplified explanation i got. Being someone with no economics background but studying a business course with an economics module i can only say you’ve saved the day as i go for my exam. Now i can explain perfect competition short run/long equilibrium with confidence. THANK YOU!!!

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