Price determination in short run

in perfectly competitive firm

Short run equilibrium: supernormal profits of
a perfectly competitive firm
• Conditions of equilibrium
• Equilibrium point (E), the
best level of output:
MR=MC and MC is
intersecting MR from
below.
• Price = MR = MC
• Cost = OQBA (OQ*OA)
• TR = OQEP
• Supernormal Profits = ABEP
Short run equilibrium: Normal Profits of a
perfectly competitive firm when AR = ATC

• The firm is in
equilibrium point at
E=MR=MC
• TC = OQEP
• TR = OQEP
• Firm earns normal
profits.
Short run equilibrium: Losses of a perfectly
competitive firm
• E=MR=MC
• Output=OQ
• TR=OQEP
• TC=OQBA
• Losses (TC-TR)=OQBA-OQEP=PEBA
• The firm will continue to produce
and operate till it is able to cover
its average variable cost. The fixed
cost is already incurred and in
such case it will be able to recover
a part of them. If the firm is not
able to cover its variable cost, then
the firm will shut down.