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Perfect Competition
Imperfect Competition
Duopsony

Oligopsony

Duopoly
Monopsony

dr.moeenuddin Monopoly Oligopoly

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DR MOEEN UD DIN
Reference Book

DR MOEEN UD DIN
 Perfect Competition

“Perfect Competition is a market model

in which there is a very large number of buyers and sellers
entry and exit are possible,
the product is homogeneous, and information is free”

Prof. Benjamin Davis

 Firm`s and Industry`s Equilibrium

“An individual firm will be in “The industry will be in

equilibrium equilibrium
with respect to output Only if all the firms
at the point of maximum in an industry are making
net returns” normal profit”
 Conditions for firm`s equilibrium
▪ There are two conditions for firm`s equilibrium
(under all the market structures, i.e., Perfect Competition, Imperfect Competition, Monopoly)

▪ Necessary Condition: Firm`s Marginal Cost must be equal to Marginal revenue.

MR = MC

∆𝑅 ∆𝐶 𝑑𝑅 𝑑𝐶
= or =
∆𝑄 ∆𝑄 𝑑𝑄 𝑑𝑄
▪ Sufficient Condition: MC curve must be rising at the point of equilibrium or MC
curve must cut MR curve from below left.

∆𝑀𝐶 ∆𝑀𝑅
>
∆𝑄 ∆𝑄
Equilibrium of a Firm under Perfect Competition
in the Short-Run
“In short-run the firm will maximize profits or minimize losses
By producing at the point
Where Marginal Revenues equals Marginal Costs”

Cases of Firm`s Short-Run Equilibrium

A. Profit Maximizing B. Loss minimizing C. Close Down Point

▪ Super Normal Profit ▪ Normal Losses
▪ Normal Profit ▪ Super Normal Losses
(Shut-Down Point)

. . . .
 A. Profit Maximization cases
1. Super Normal Profit
“Above Normal Profit is a profit greater than that
which is just sufficient to ensure that
a firm will continue to supply its existing product or service”

AR > AC

TR > TC

at Equilibrium

( P = AR = MR = MC ) > ( AC )

. . . .
Super Normal Profit

Total Revenue Area

TR = OQ × OP = OQEP area

Total Cost Area

TC = OQ × OK = OQAK area

Profit or Losses
π = TR - TC
= OQEP – OQAK
= PEAK area

. . . .
 2. Normal Profit (Break-even Point)
“Normal Profit is a profit that is just sufficient to
ensure that a firm will continue to supply
its existing good and service”

AR = AC

TR = TC

at Equilibrium

( P = AR = MR = MC = AC )

. . . .
Super Normal Profit
(Break-Even Point)

Total Revenue Area

TR = OQ × OP = OQEP area

Total Cost Area

TC = OQ × OP = OQEP area

Profit or Losses
π = TR - TC
= OQEP – OQEP
= zero
(Zero profit mean normal profit)

. . . .
 B. Loss Minimization Cases
1. Normal Loss (Bearable Loss)
“Normal losses means when firm`s total revenue are sufficient
To cover variable costs and make some contribution towards fixed costs,
then the firm will continue to produce despite over all losses”

AVC < AR < AC

TVC < TR < TC

This means that the firm is bearing just a part of its average fixed cost.
The firm will continue its business on good expectation in very near future.

at Equilibrium

(AVC) < ( P = AR = MR = MC ) < ( AC )

. . . .
Total Revenue Area Normal Loss (Bearable Loss)
TR = OQ × OP = OQEP area

Total Cost Area

TC = OQ × OF = OQLF area

Profit or Losses
π = TR - TC
= OQEP – OQLF
= - PELF area

TVC = OQ × OT = OQAT area

TC = TFC + TVC
TFC = TC – TVC
TFC = OQLF - OQAT = FLAT area
TFC = PELF + PEAT

Firm satisfies PEAT part of its total fixed cost by its

revenue and incur PELF part as minimum loss

. . . .
 2. Super Normal Loss (Shut-Down Point)
“Shut-down price is a market price
Which is so low that a profit maximizing supplier is unable
to recoup the short-run unit variable cost of producing a product ”

AVC = AR < AC
TVC = TR < TC

This means that the firm is bearing its entire average fixed cost even after its operation.
If it does not operate the business, it has to bear the same cost.
Therefore, it is better to shut-down the business.

at Equilibrium

(AVC = P = AR = MR = MC ) < ( AC )

. . . .
Total Revenue Area Super Normal Loss (Shut-down point)
TR = OQ × OP = OQEP area

Total Cost Area

TC = OQ × OK = OQCK area

Profit or Losses
π = TR - TC
= OQEP – OQCK
= - PECK area

TVC = OQ × OP = OQEP area

(equal to TR)
TC = TFC + TVC
TFC = TC – TVC
TFC = OQCK - OQEP = PECK area
(equal to loss)

At this price firm is unable to generate sufficient

revenue make any contribution towards its fixed
costs, therefore, it necessitates to shut-down the
business

. . . .
 C. Close-Down Point
“Close-down price is a market price Which is too low that a profit
maximizing supplier cannot even cover its variable costs so that losses are
incurred, necessitating a decision to close down its production facilities”

AR < AVC < AC

TR < TVC < TC

This means that the firm is bearing not only its total fixed costs
but a part of its total variable cost also even after its operation.
Therefore, it is better to close-down the business.

at Equilibrium

( P = AR = MR = MC ) < AVC < ( AC )

. . . .
 Close-Down Situation
Total Revenue Area
TR = OQ × OP = OQEP area

Total Cost Area

TC = OQ × OD = OQND area

Profit or Losses
π = TR - TC
= OQEP – OQND
= - PEND area

TVC = OQ × OL = OQAL area

(more than TR)
TC = TFC + TVC
TFC = TC – TVC
TFC = OQND - OQAL = LAND area
(just a part of loss)

At this price firm is unable to generate sufficient

revenue make any contribution towards not only its
fixed costs rather to a part of its variable costs LEAP,
therefore, it necessitates to close-down the business

. . . .
 Summary of the
Possibilities of Firm`s Equilibrium
under Perfect Competition in the Short-Run

Super Normal Profit Norma profit Normal Loss Shut-Down Situation Close-Down Situation

( P = AR = MR = MC ) > ( AC ) ( P = AR = MR = MC ) < AVC < ( AC )

( P = AR = MR = MC = AC ) (AVC = P = AR = MR = MC ) < ( AC )

(AVC) < ( P = AR = MR = MC ) < ( AC )

. . . .
 Equilibrium of a Firm under Perfect Competition
in the Long-Run
“In the long=Run firms are in equilibrium when
they adjust their plants to produce at the minimum point of their long-run AC curve,
which is tangent (at this point) to the demand curve defined by the market price.
In the long-run the firms will be earning just normal profit,
which are included in the LAC”
Prof. A. Koutsoyiannis
In the Long-Run
▪ A firm can increase or decrease its output by changing all the factors.
▪ A firm can replace old low-capacity plants by the new high-capacity plants.
▪ A firm can add new plants.
▪ New firms can enter the industry to compete the existing firms.
▪ Old firms can leave the industry.
▪ All costs are variable and not fixed.

. . . .
 Normal Profit
Total Revenue Area
TR = OQ × OP = OQEP area

Total Cost Area

TC = OQ × OP = OQEP area

Profit or Losses
π = TR - TC
= OQEP – OQEP
= zero
(Zero profit mean normal profit)

At Equilibrium
P = AR = MR = LAC = LMC
. . . .
 .

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