Under perfect competition, firms are price takers and cannot influence the market price. The market price is determined by the intersection of total industry demand and supply. In the short run, a firm can be in a situation of normal profit, super normal profit, or loss depending on the relationship between average revenue (AR) and average cost (AC). In the long run, all firms will earn only normal profits as inefficient firms exit the industry. The shutdown point occurs when a firm's average variable cost equals its average revenue.

1. PERFECT COMPETITION: PRICE
AND OUTPUT DETERMINATION
AND SITUATIONS OF THE FIRM IN
SHORT AND LONG RUN
PRESENTED BY:
ANAND SARAN

2. MEANING OF PERFECT COMPETITION
A market structure in which the following five criteria
are met:
• All firms sell an identical product
• All firms are price takers - they cannot control the
market price of their product
• All firms have a relatively small market share
• Buyers have complete information about the
product being sold and the prices charged by each
firm
• The industry is characterized by freedom of entry
and exit

3. EQUILIBRIUM OF INDUSTRY AND FIRM
• Firms are price takers
• The price is determined by the market forces:
market demand and market supply
• The price for all the firms in the industry is the
same

4. • Price equilibrium of the industry: the point
where demand=supply
• The firms will follow this price
• Price=Marginal Revenue=Average Revenue

5. OUTPUT DETERMINATION OF A FIRM
• MR=MC
• MC Curve intersects MR Curve from below

6. DETERMINATION OF PROFIT OR LOSS
OF A FIRM
• The concept of average revenue and average cost
are used to determine the situation of profit or
loss
• If AC=AR it means Normal Profit
• If AC>AR it means Loss
• If AC<AR it means Super Normal Profit

7. LONG RUN: NORMAL PROFIT
• AC=AR

8. SHORT RUN
In short run the firm can change only the variable
factors and the fixed factors cannot be changed
The firm may face any one of the following
situations in short run:
• Normal Profit
• Super Normal Profit
• Loss

9. SHORT RUN: SUPER NORMAL PROFIT
• AR>AC

10. SHORT RUN: NORMAL PROFIT AND LOSS

11. SHUTDOWN POINT
• The shutdown point is the situation where a firm
earns just enough revenue to cover its total
variable costs.
• AVC=AR