Unit- 5.

Perfect Competition | Characteristics | Market period, Short run and Long run in
Perfectly Competitive Market | Equilibrium in Market Period | Reserve Price in
Market Period | Equilibrium in Short Run | Supernormal Profit, Normal Profit
and Loss in Short Run | Shut down Point | Equilibrium in Long Run Run |
Supernormal Profit, Normal Profit and Loss in Short Run |
 Perfect Competition
• Perfect competition is defined as a market situation where
there are a large number of sellers of a homogeneous product
• An individual firm supplies a very small portion of the total
output and is not powerful enough to exert an influence on the
market price
• As the individual firm have no influence on pricing decision,
the price in the market is determined by price fixed by the
industry

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• Hence, in a Perfect Market, firms are price takers and the
industry is price maker

Supply

Price Market Price

Demand

Industry Firm
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PERFECT KNOWLEDGE
All firms in the industry aware about
level of demand, on going prices of
other firms, etc. in the market
HORIZONTAL
DEMAND CURVE
Least changes in price make the
demand stable in the market. Hence
the demand curve will be horizontal
PERFECT MOBILTY OF
FACTORS
The factors such as capital, labour,
technology, etc. can be move from
one place to another
LARGE NO.OF BUYERS
AND SELLERS
It is too large that, single seller or
buyer cannot influence the market
forces of demand and supply
PRODUCT
HOMOGENEITY
The product in the industry is unique
and any price variation causes
customer sticking or switching
FREE ENTRY AND EXIT
Separate firm can decide when to
enter in the market and leave from
the market
LAW OF ONE PRICE
Industry is price maker and the same
price is adopted by all firms in the
industry
 • Selling price = 40
• Revenue = 40*3000 = 1,20,000
• Cost = 1,29,000
• Profit/Loss = -(9,000) Marginal Cost= 43
Sales increases

• Selling price = 40
• Revenue = 40*4000 = 1,60,000
• Cost = 1,60,000
Marginal Cost= 40
• Profit/Loss = 0

• Selling price = 40
• Revenue = 40*5000 = 2,00,000
• Cost = 2,10,000
Marginal Cost= 42
• Profit/Loss = -(10,000)
 LONG RUN
The firm can vary all its
inputs, and hence the firm can
adjust their plant size to
increas their output to achieve
maximum profit
03
SHORT RUN
The time period, in which a
firm cannot expand its existing
plant and a new plant cannot be
erected to meet the increased
demand. But they can meet
throung over working their
fixed capacity plant
02
MARKET PERIOD
The time period is so short
that, the firm cannot increase
its output and supply (supply
of the product is fixed) and the
supply is perfectly inelastic
01
 Equilibrium in Market Period
• In the market period, the supply will be perfectly inelastic. The firm neither
can save the product for future sale nor he can carry over previous stock
due to perishability. The whole produces should be sold on the same day.
SS1 SS SS2
SS SS

P1
P1
P
P0 P0
P2
P2 DD1
DD
DD DD
DD2

Q Q Q
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 Reserve Price in Market Period
• Reserve price is noticed in case of semi perishable and durable
goods in market period
• It is the lowest price at which no firm will be willing to sell the
produce and entire stock is stored for favorable market condition
SS

DD

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Q 8
 Equilibrium in Short Run
 Conditions for Equilibrium

MC=MR

MC CUTS MR
FROM BELOW

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 MC AC
Equilibrium

AR=MR=Price

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 Supernormal Profit

MC AC
Equilibrium

AR=MR=Price
Supernormal Profit

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 Normal Profit
AC

MC
Equilibrium

AR=MR=Price

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 Loss AC

MC
Equilibrium

Loss
AR=MR=Price

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Supernormal Profit Normal Profit Loss

Equilibrium Equilibrium
Equilibrium
AC
AC
MC MC MC
AC

AR=MR=Price AR=MR=Price AR=MR=Price

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 Shutdown Point
• Otherwise known as closing down point
• It is that level of output, at which the firm is not able to cover
its variable cost
• In such situation, the AC rises, and the firm have left with only
option of exit from the industry in order to minimize the loss
• The firm can do what ever action it can take for reduction in
the variable cost such as lay-off of additional employees,
selection of cheap substitute of the raw materials etc.

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 Equilibrium in Long Run
• In long run, the firm can alter both variable and fixed factors to
meet increased demand
• Under long run, the condition for equilibrium is MC=P=AC
– The condition for Supernormal profit is P>AC
– Normal Profit when P=AC
– Loss when P<AC

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 Equilibrium
Y LMC

LAC

AR=P=MR

0 Quantity X

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 Supernormal Profit
Y LMC

LAC

AR=P=MR
Supernormal Profit

0 Quantity X

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 Normal Profit
Y LMC

LAC

AR=P=MR

0 Quantity X

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 Loss
LMC
Y
LAC

Loss
AR=P=MR

0 Quantity X

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