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Microeconomics Assignment

This document is a microeconomics assignment on perfect competition submitted by 4 students. It defines a market and describes the characteristics of perfect competition, including a large number of buyers and sellers and identical products. It discusses perfect competition in the short run and long run, including how firms determine equilibrium output and price and whether they make normal profits, abnormal profits, or losses. It also lists some limitations of perfect competition.

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jamila mufazzal
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489 views16 pages

Microeconomics Assignment

This document is a microeconomics assignment on perfect competition submitted by 4 students. It defines a market and describes the characteristics of perfect competition, including a large number of buyers and sellers and identical products. It discusses perfect competition in the short run and long run, including how firms determine equilibrium output and price and whether they make normal profits, abnormal profits, or losses. It also lists some limitations of perfect competition.

Uploaded by

jamila mufazzal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MICROECONOMICS ASSIGNMENT

TOPIC: PERFECT COMPETITION

ASSIGNED BY: MA’AM MARIA AIJAZ SHAIKH

SUBMITTED BY:
DUA ALLAH DITO TUNIO JAMEELA MUFAZZAL HUSSAIN
2K19/BBA/54 ZAKI
2K19/BBA/79
NEHA MEHBOOB YUSRA HALEPOTO
2K19/BBA/129 2K19/BBA/197
MEANING OF MARKET

• An actual or nominal place where forces of demand


and supply operate, and where buyers and sellers
interact (directly or through intermediaries) to trade
goods, services, or contracts or instruments, for
money or barter.
• Types of markets:
– Perfect competition
– Monopoly
– Oligopoly
Perfect Competition
• A type of market structure in which a large
number of producers and sellers are
producing and selling homogenous products.
Characterstics of Perfect Competition

• Very large number of buyers and sellers


• Identical products
• Perfect knowledge
• Freedom of entry and exit
• Free mobility of factors of production
• Free operations of demand and supply
The Short Run and Long Run
• Short Run: The number of firms is fixed.
Depending on its cost and revenue, a firm might
be making any type of profit or even loss.
• Long Run: The level of profits affects entry and
exit from the industry. If supernormal profits are
made, new firms will be attracted into the
industry, whereas if losses are being made, firms
will leave.
Short Run Equilibrium
• Price:
– Marginal Revenue=Marginal Cost/ MR=MC
– Average Revenue =Price
– According to this firm in Perfect Competition is in equilibrium where
MR or price is equal to marginal cost. The point where MR=MC=Price,
the firm produces the best level of output.
Short Run Equilibrium (cont’d)
• Output: Since price for a firm under PC is
determined by the market, it now has to make an
output decision. Assuming that firms under PC want
to MAX Profits, each firm will produce that level of
output where MC=MR. This is where price equals
MC.
Short Run Equilibrium (cont’d)
• PROFIT: Whether a firm will make normal profit, abnormal
profit, loss will depend upon the position of the AC curve
relative to its AR curve.
– NORMAL PROFIT: Average Cost=Average Revenue
Short Run Equilibrium (cont’d)
– Abnormal Profit: Total revenue exceeds total costs
and average revenue is greater and average costs.
Short Run Equilibrium (cont’d)
– Loss: Total revenue is less than total cost and
average revenue is less than average cost.
Short Run Equilibrium (cont’d)
• Degrees of Loss:
– Positive contribution: If P > AVC, it is getting a positive contribution towards covering of
its fixed cost and will therefore continue to operate. If it shuts down now, it will have to
bear a loss of the full extent of its fixed cost.
– Zero contribution; the shut down point: If P=AVC, it has reached a decision making
point called the shutdown point. Its contribution towards covering its fixed costs is zero.
If the firm shuts down now, it will accept the loss of its total fixed costs. A firm may
continue to operate if it expects costs to go down or price to rise.
– Negative contribution; making an avoidable loss: If P < AVC, the firm will definitely
shutdown. The reason is that if it continues to operate now, it is making a loss which is
avoidable (its variable costs).
Long Run Equilibrium
• From short run abnormal profit to long run normal profit: In the long run, if
typical firms are making supernormal profits, new firms will be attracted into
the industry. This causes industry supply to expand which in turn leads to a
fall in price. Supply will go on increasing and price falling until firms are
making only normal profits.
Long Run Equilibrium (cont’d)
• Moving from short run loss to long run normal profit: If the price were
initially below PL, this will lead to firms exiting the industry, thus shifting
the industry supply curve to the left, price will rise. Firms will keep exiting
the industry and price will continue to rise till firms begin to make normal
profits. Exit from the industry will thus stop and long run equilibrium will
be established.
LIMITATIONS OF PERFECT COMPETITION
• No guarantee that the goods produced will be distributed to the members of
the society in the fairest of proportions and will lead to the optimum
combination of goods being produced. E.g. Demerit goods.
• Production of such goods may lead to undesirable side effects such as
pollution.
• Wastage of resources because there are many firms, producing the same
items hence due to loss numerous firms might shutdown as they can’t cope
up with the competition.
• No internal and external economies of scale as they are not big in size.
• Fluctuations in price, as in short run first firms might be experiencing
supernormal profits then as time passes by more firms come in they might be
having normal profits and less prices than before and eventually losses too.
Hence in sometime many firms will close up and the prices will rise once again
and eventually the firms will be enjoying normal profits.
• There is lack of variety and thou having an incentive to develop new
technology they might not be able to afford it. They might also be afraid that
if they did develop new more efficient methods of production someone might
copy it in which case the investment would have been a waste of money.
The assumptions of PC are very strict only a few
firms meet these conditions. Certain agricultural
markets are perhaps closest to PC. Thou it plays a
very important role in economic analysis and
policy. The role of PC thus remains that of useful
analytical tool. One that is not necessarily
attainable or even desirable; but one that gives us
the benchmark for optimum allocation of
resources and provides key insights into the
working of a market economy.
THE END

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