PERFECT COMPETITION
? A LARGE NUMBER OF BUYERS & SELLERS.
? PRODUCT SOLD BY ALL THE FIRMS IN THE INDUSTRY IS HOMOGENEOUS.
? THERE IS FREE ENTRY & EXIT FOR THE FIRM.
? THERE IS PERFECT KNOWLEDGE ABOUT MARKET CONDITION ON THE PART
OF BUYERS & SELLERS.
? FACTORS OF PRODUCTION ARE PERFECTLY MOBILE.
? TRANSPORT COST IS ASSUMED TO BE ABSENT.
? THERE IS NO GOVERNMENT INTERVENTION.
PRICE
DEMAND
( IN TONNES)
SUPPLY
( IN TONNES)
2
4
6
8
10
12
14
100
200
300
400
500
600
700
700
600
500
400
300
200
100
O Qd /Qs
PRICE
0
100 200 300 400 500 600 700
2
4
6
8
10
12
14
S’
S D
D’
EQUILIBRIUM OF THE INDUSTRY
OUTPUT O
PRICE
10
MPS
20
1000
RESERVE PRICE
DURABLE GOODS PERISHABLE GOODS
OUTPUT O
PRICE
MPS
1000
OUTPUT O
PRICE
MPS
DURABLE GOODS PERISHABLE GOODS
OUTPUT O
PRICE
MPS
D
D
1
P
D
D
1
P
D’
D
1
’
P’
P’
D’
D
1
’
D’’
D
1
’’
P’’
D’’
D
1
’’
P’’
OUTPUT O
PRICE
MPS
P
P
1
D’
D
1
’
Q
M
D
D
1
SRS
P’
LRS
P’’
EQUILIBRIUM OF MARKET / INDUSRY
Q
S
Q
L
MARKET
O
OUTPUT
PRICE
D
D1
S
S1
E
P
O
OUTPUT
PRICE
P
AR = MR
AC
MC
FIRM
F
Q
R
AR = QR
TR = OQRP
AC = QF
TC =
G
OQFG
PROFIT = TR - TC
= GFRP
EQUILIBRIUM OF A FIRM IN THE SHORT - RUN
MARKET
O
OUTPUT
PRICE
D
D1
S
S1
E
P
O
OUTPUT
PRICE
P
AR = MR
AC
MC
FIRM
Q
AR = QE
TR = OQEP
AC = QF
TC = OQFG
IN THE SHORT-RUN
E
G
F
LOSS = TC – TR = PEFG
MARKET
O
OUTPUT
PRICE
D
D1
S
S1
E
P
O
OUTPUT
PRICE
P
AR = MR
AC
MC
FIRM
F
Q
R
AR = EQ’
TR = OQ’EP’
AC = Q’E
TC = OQ’EP’
AR’ = MR’
E’
P’
S’
S’
1
IN THE LONG-RUN
E
Q’
P’
INDUSTRY FIRM
O O
0UTPUT
0UTPUT
PRICE PRICE
P P AR = MR
E
Q
F
G
S
S’
D
D’
AC
MC
AR’ = MR’
S
S’
P’
E’
Q’
SHUT-DOWN POINT
IN THE SHORT-RUN A MONOPOLY FIRM CAN NOT COVER ITS TOTAL COST
i.e. ITS TOTAL COST IS GREATER THAN TR, IT HAS TWO OPTIONS;
1] TO SHUT-DOWN THE FIRM IMMEDIATELY.
2] TO CONTINUE TO CARRY ON ITS BUSINESS EVEN AT LOSS AND WIND-UP
THE BUSINESS AND QUIT THE INDUSTRY IN THE LONG-RUN.
IF A FIRM SHUTS DOWN ITS PRODUCTION, IT CAN NOT QUIT THE IN THE
INDUSTRY IN THE SHORT-RUN. HENCE DURING THAT PERIOD FIXED COST IS
INCURRED. THUS, BY SHUTTING DOWN PRODUCTION ITS LOSS BECOMES EQUAL TO
TFC.
THEREFORE, A LOSS-MAKING FIRM DECIDES TO SHUT DOWN ONLY IF ITS
MINIMUM LOSS IS GREATER THAN TFC. FOR EXAMPLE,
TFC = Rs. 200000, TVC = Rs. 100000 & TR = Rs. 2,50, 000.
IN THIS CASE, TC = Rs. 300000 & TR = Rs. 2,50,000 SO, LOSS = Rs. 50,000 .
IF THE FIRM DECIDES TO SHUT DOWN, ITS LOSS WILL BE EQUAL TO TFC
i.e. Rs. 200000. IT IS BETTER TO CARRY ON THE PRODUCTION IN THE SHORT-RUN
BUT QUIT THE INDUSTRY IN THE LONG-RUN.
THEREFORE, IF A FIRM’S TR COVERS THE TVC & PARTLY TFC, IT DOES NOT SHUT
DOWN. BUT IF ITS TR IS LESS THAN TVC, IT IS BETTER TO SHUT DOWN.
FOR EXAMPLE,
TFC = Rs. 200000, TVC = Rs. 100000 & TR = Rs. 90,000
SO LOSS = Rs. 2,10,000. IF IT SHUTS DOWN, ITS LOSS WILL REDUCE TO Rs. 200000
WHICH IS NOTHING BUT THE TOTAL FIXED COST (TFC)
LET US SEE THE DIAGRAMIC REPRESENTATION OF SHUT - DOWN POINT
OUTPUT
O
COST/REVENUE
AC
AVC
MC
AR = MR
E
Q
R
P
F
S
T
TC = OQST
TR = OQEP
TVC = OQRF
TFC = FRST
TR
TVC
TC
LOSS
RESERVE PRICE IS THE MINIMUM PRICE THAT FIRMS ANTICIPATE. IF THE
ACTUAL PRICE IS EQUAL TO OR LESS THAN THE RESERVE PRICE FIRMS REFUSE
TO SUPPLY THE OUTPUT i.e. SUPPLY IS ZERO.
RESERVE PRICE DEPENDS ON THE FOLLOWING FACTORS ;
1) EXPECTED CHANGE IN PRICE
2) EXPECTED CHANGE IN DEMAND
3) COST OF PRODUCTION
4) LIQUIDITY PREFERENCE
5) STORAGE EXPENSES
6) DURABILITY
doc_125573599.pptx
? A LARGE NUMBER OF BUYERS & SELLERS.
? PRODUCT SOLD BY ALL THE FIRMS IN THE INDUSTRY IS HOMOGENEOUS.
? THERE IS FREE ENTRY & EXIT FOR THE FIRM.
? THERE IS PERFECT KNOWLEDGE ABOUT MARKET CONDITION ON THE PART
OF BUYERS & SELLERS.
? FACTORS OF PRODUCTION ARE PERFECTLY MOBILE.
? TRANSPORT COST IS ASSUMED TO BE ABSENT.
? THERE IS NO GOVERNMENT INTERVENTION.
PRICE
DEMAND
( IN TONNES)
SUPPLY
( IN TONNES)
2
4
6
8
10
12
14
100
200
300
400
500
600
700
700
600
500
400
300
200
100
O Qd /Qs
PRICE
0
100 200 300 400 500 600 700
2
4
6
8
10
12
14
S’
S D
D’
EQUILIBRIUM OF THE INDUSTRY
OUTPUT O
PRICE
10
MPS
20
1000
RESERVE PRICE
DURABLE GOODS PERISHABLE GOODS
OUTPUT O
PRICE
MPS
1000
OUTPUT O
PRICE
MPS
DURABLE GOODS PERISHABLE GOODS
OUTPUT O
PRICE
MPS
D
D
1
P
D
D
1
P
D’
D
1
’
P’
P’
D’
D
1
’
D’’
D
1
’’
P’’
D’’
D
1
’’
P’’
OUTPUT O
PRICE
MPS
P
P
1
D’
D
1
’
Q
M
D
D
1
SRS
P’
LRS
P’’
EQUILIBRIUM OF MARKET / INDUSRY
Q
S
Q
L
MARKET
O
OUTPUT
PRICE
D
D1
S
S1
E
P
O
OUTPUT
PRICE
P
AR = MR
AC
MC
FIRM
F
Q
R
AR = QR
TR = OQRP
AC = QF
TC =
G
OQFG
PROFIT = TR - TC
= GFRP
EQUILIBRIUM OF A FIRM IN THE SHORT - RUN
MARKET
O
OUTPUT
PRICE
D
D1
S
S1
E
P
O
OUTPUT
PRICE
P
AR = MR
AC
MC
FIRM
Q
AR = QE
TR = OQEP
AC = QF
TC = OQFG
IN THE SHORT-RUN
E
G
F
LOSS = TC – TR = PEFG
MARKET
O
OUTPUT
PRICE
D
D1
S
S1
E
P
O
OUTPUT
PRICE
P
AR = MR
AC
MC
FIRM
F
Q
R
AR = EQ’
TR = OQ’EP’
AC = Q’E
TC = OQ’EP’
AR’ = MR’
E’
P’
S’
S’
1
IN THE LONG-RUN
E
Q’
P’
INDUSTRY FIRM
O O
0UTPUT
0UTPUT
PRICE PRICE
P P AR = MR
E
Q
F
G
S
S’
D
D’
AC
MC
AR’ = MR’
S
S’
P’
E’
Q’
SHUT-DOWN POINT
IN THE SHORT-RUN A MONOPOLY FIRM CAN NOT COVER ITS TOTAL COST
i.e. ITS TOTAL COST IS GREATER THAN TR, IT HAS TWO OPTIONS;
1] TO SHUT-DOWN THE FIRM IMMEDIATELY.
2] TO CONTINUE TO CARRY ON ITS BUSINESS EVEN AT LOSS AND WIND-UP
THE BUSINESS AND QUIT THE INDUSTRY IN THE LONG-RUN.
IF A FIRM SHUTS DOWN ITS PRODUCTION, IT CAN NOT QUIT THE IN THE
INDUSTRY IN THE SHORT-RUN. HENCE DURING THAT PERIOD FIXED COST IS
INCURRED. THUS, BY SHUTTING DOWN PRODUCTION ITS LOSS BECOMES EQUAL TO
TFC.
THEREFORE, A LOSS-MAKING FIRM DECIDES TO SHUT DOWN ONLY IF ITS
MINIMUM LOSS IS GREATER THAN TFC. FOR EXAMPLE,
TFC = Rs. 200000, TVC = Rs. 100000 & TR = Rs. 2,50, 000.
IN THIS CASE, TC = Rs. 300000 & TR = Rs. 2,50,000 SO, LOSS = Rs. 50,000 .
IF THE FIRM DECIDES TO SHUT DOWN, ITS LOSS WILL BE EQUAL TO TFC
i.e. Rs. 200000. IT IS BETTER TO CARRY ON THE PRODUCTION IN THE SHORT-RUN
BUT QUIT THE INDUSTRY IN THE LONG-RUN.
THEREFORE, IF A FIRM’S TR COVERS THE TVC & PARTLY TFC, IT DOES NOT SHUT
DOWN. BUT IF ITS TR IS LESS THAN TVC, IT IS BETTER TO SHUT DOWN.
FOR EXAMPLE,
TFC = Rs. 200000, TVC = Rs. 100000 & TR = Rs. 90,000
SO LOSS = Rs. 2,10,000. IF IT SHUTS DOWN, ITS LOSS WILL REDUCE TO Rs. 200000
WHICH IS NOTHING BUT THE TOTAL FIXED COST (TFC)
LET US SEE THE DIAGRAMIC REPRESENTATION OF SHUT - DOWN POINT
OUTPUT
O
COST/REVENUE
AC
AVC
MC
AR = MR
E
Q
R
P
F
S
T
TC = OQST
TR = OQEP
TVC = OQRF
TFC = FRST
TR
TVC
TC
LOSS
RESERVE PRICE IS THE MINIMUM PRICE THAT FIRMS ANTICIPATE. IF THE
ACTUAL PRICE IS EQUAL TO OR LESS THAN THE RESERVE PRICE FIRMS REFUSE
TO SUPPLY THE OUTPUT i.e. SUPPLY IS ZERO.
RESERVE PRICE DEPENDS ON THE FOLLOWING FACTORS ;
1) EXPECTED CHANGE IN PRICE
2) EXPECTED CHANGE IN DEMAND
3) COST OF PRODUCTION
4) LIQUIDITY PREFERENCE
5) STORAGE EXPENSES
6) DURABILITY
doc_125573599.pptx