This document discusses market structures and perfect competition. It defines perfect competition and its key features. It then examines the demand curve, profit maximization approaches, and equilibrium of a perfectly competitive firm in both the short-run and long-run. In the short-run, a competitive firm will produce at the quantity where marginal revenue equals marginal cost to maximize profits. In the long-run, all firms will earn only normal profits and produce where price equals minimum average cost. The document also provides an example to calculate total revenue, marginal revenue, marginal cost, profit maximizing output, and break-even point for a competitive firm.

1. Market Structures

2. Types of Markets
• 1) Perfectly Competitive Market
• 2) Monopoly
• 3) Monopolistically Competitive Market
• 4) Oligopolistically Competitive Market

3. Perfect Competition
Features
1. Large number of buyers and sellers
2. Homogeneous products
3. Perfect knowledge about the market conditions
4. Perfect mobility of factors of production
5. No transportation cost
6. No government intervention
7. Free entry and exit

4. The Demand Curve of firm under Perfect
Competition
Ed = ∞
(perfectly
elastic)
D1
P1 P1 D’ = MR’
P2 D” = MR”
P2
S1

5. Quantity
(units)
Price (₹) Total
revenue
(₹)
Marginal
revenue
(₹)
0 4 0 4
1 4 4 4
2 4 8 4
3 4 12 4
4 4 16 4
5 4 20 4
6 4 24 4
7 4 28 4
8 4 32 4
9 4 36 4
10 4 40 4
11 4 44 4
TR

6. Profit Maximisation by a Competitive Firm:
TR – TC Approach
Quantity Total revenue Total cost Economic
profit(TR – TC)
0 0 22 -22
1 25 45 -20
2 30 66 -16
3 75 85 -10
4 100 100 (A)0
5 125 114 11
6 150 126 24
7 175 141 34
8 200 160 40
9 225 183 42
10 250 210 40
11 275 245 30
12 300 300 (B)0
13 325 360 -35
A
B

7. Types of profits
Economic Profit = Total revenue – Total cost( explicit & implicit cost)
Accounting profit = Total revenue – Accounting cost (explicit cost)
Normal profit - is defined as the least possible level of profit that will
keep a firm afloat in business. The firm ends up covering all costs
including both, implicit and explicit costs.
Normal Profit : TR = TC (Thus Economic Profit = Zero)
Gives Break – Even point for the firm
Economic Loss - profit less than normal profit
Economic Loss : TR < TC (Economic Profit = -ve)
Supernormal (Economic) Profit - is any profit in excess of normal
profit .
Supernormal Profit : TR > TC ( Economic Profit = +ve)

8. Profit Maximisation using MR – MC Approach
• As long as marginal revenue is greater than marginal cost, increasing
output will raise profit.
• When marginal revenue is less than marginal cost, decreasing output
will raise profit.
• Output rule: For maximization of profit, a firm should produce at the
level at which
Marginal Revenue(MR) = Marginal Cost(MC)
(This rule applies to all firms regardless of their market structure)

9. Profit Maximisation using MR – MC Approach

10. Output Total
revenue(₹)
Total
cost (₹)
0 0 3
1 6 5
2 12 8
3 18 12
4 24 17
5 30 23
6 36 30
7 42 38
8 48 47
Profit(₹) Marginal
revenue(₹)
Marginal cost
(₹)
Change in
profit(₹)
-3 ----- ------ ------
1 6 2 4
4 6 3 3
6 6 4 2
7 6 5 1
7 6 6 0
6 6 7 1
4 6 8 2
1 6 9 3

11. Short Run Equilibrium for a firm
Supernormal Profits
Profit maximising output;
MR = MC at pt. L
Output = ON; Price = OP
Avg. cost = MN = OK
TR = OP x ON = OPLN
TC = Avg. cost x ON
= OK x ON = OKMN
Profit = OPLN – OKMN
= PKLM

12. Normal Profits
Profit maximising level of output
MR = MC
Price = OP; output = OM
Avg. cost = KM = OP
Total revenue = OPKM
Total cost = OPKM
Profit =OPKM - OPKM
= Zero Economic Profits
= Normal Profit

13. Economic Loss
Profit maximising level of output
MR = MC; price = OP; output = OK
Avg. cost = SK = OT
Total revenue = OP x OK = OPNK
Total cost = OT x OK = OTSK
Economic loss(TC > TR)
= OTSK – OPNK
= PTSN
Total cost = fixed + variable cost
= ETSF + OEFK
Revenue is covering the entire
variable cost & part of fixed cost

14. Shut down point
when, P = min 𝐴𝑉𝐶 at Z, price OP
The firm, even though is incurring
losses will continue to produce as
long as the revenue is able to
cover variable costs
Fixed costs have to be borne by
the firm in the short run whether
its producing or not
Thus, shut down pt. = when price
is equal to minimum average
variable cost

15. Short run supply curve of perfectly
competitive firm

17. Profit maximisation
P = MR = MC
Break even:
Price = min AC
Shut – Down:
Price = min AVC
Price,
cost

18. Long run equilibrium
condition
•Price = LMC
•Price = LAC
•Normal profits

19. Long run Equilibrium
At A firm earns
supernormal
profits
As new firms
enter, supply
increases ,
Price goes down &
firms now earn
normal profits

20. Equilibrium of the industry
In the short run, the two conditions required for the equilibrium of
the industry:
1. The demand and supply of the product of the industry must be
equal
2. All firms in the industry must be in equilibrium whether they are
making profits or having losses
In the long run,
1. The demand & supply of the product should be equal
2. All firms should be earning normal profits

21. Efficiency in Perfect Competition
• Allocative Efficiency – at Q1
resources are allocated
efficiently & both consumer
and producer surplus is
maximised, any other output
less or more would reduce
either producer or consumer
surplus
• For each firm
• P = MR = AR = MC

22. • Productive efficiency – in the
long run each firm enjoys
normal profits as
• P = MR = AR = min AC
• Producers are using least &
cheapest resources to
produce goods
• Production is efficient

23. Q3. The short run costs for different levels of output for a firm in a
perfectly competitive industry is given below, the price determined
by industry demand and supply is Rs. 4
Calculate the following:
a. Total Revenue at each stage of output
b. MR per unit at each level of output
c. MC per unit at each level of output
d. Determine the profit maximizing/loss
minimizing level of output
e. The economic profit/economic loss at
the point determined in part d.
f. Find the outputs at which the firm
Breaks -Even
Quantity Total cost
0 80
20 200
40 260
60 300
80 320
100 340
120 370
140 420
160 500
180 720

24. Quantity Price TR TC MR
= ∆𝑻𝑹/∆Q
MC
= ∆𝑻𝑪/∆Q
Economic
profits
=TR - TC
0 4 0 80 -- ---- -80
20 4 80 200 4 6 -120
40 4 160 260 4 5 -100
60 4 240 300 4 3 -60
80 4 320 320 4 1 0
100 4 400 340 4 1 60
120 4 480 370 4 2.5 110
140 4 560 420 4 2.5 140
160 4 640 500 4 4 140
180 4 720 720 4 11 0
Profit maximising: MR = MC, 160 units profit = 140
Break even: TR = TC , at 80 units & 180 units