Essay on Types of Market Structures - Economics

4592 Words Jan 1st, 2012 19 Pages
PERFECT COMPETITION
Short Run Equilibrium of the Firm Under Perfect Competition: Definition and Explanation: By short run is meant a length of time which is not enough to change the level of fixed inputs or the number of firms in the industry but long enough to change the level of output by changing variable inputs. In short period, a distinction is made of two types of costs (i) fixed cost and (ii) variable cost. The fixed cost in the form of fixed factors i.e., plant, machinery, building, etc. does not vary with the change in the output of the firm. If the firm is to increase or decrease its output, the change only takes place in the quantity of variable resources such as labor, raw material, etc. Further, in the
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The firm would not stop short of ON output because producing another unit adds more to the revenue than to cost (MR > MC). Hence, ON is the best level of output where profit of the firm is maximum.

(2) Zero Profit of a Firm: A firm, in the short run, may be making zero economic profit or normal economic profit. It may here be remembered that although economic profit is zero, all the resources including entrepreneurs are being paid their opportunity. So they are getting a normal profit the case of normal profits of a firms at break even price is explained with the help of the diagram 15.4.

We assume in the figure (15.4) that OP is the prevailing market price and PK is the average revenue, marginal revenue curve. At point K, which is the break even price for a Competitive firm, the MR, MC and ATC are all equal. The firm produces OM output-and sells at market price OP. The total revenue of the firm to equal is the area OPKM. The total cost of producing OM output also equals the area OPKM. The firm is earning only normal profits. It is a situation in which the resources employed by the firm are earning just what they could-earn in some other alternative occupations.

(3) Loss Minimizing Case: The firm in the short rue is minimizing tosses if the market price is smaller than average total cost but larger than average variable cost. The loss minimizing position of a price taker firm is

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