Economics Class 12 Revision Notes Microeconomics Chapter 4 The Theory of the Firm Under Perfect Competition
1.Perfect Competition
A market in which we find perfect competition between a large number of buyers and a large number of sellers of a homogeneous product and uniform price is called perfect competition market.
2.Features of Perfect Competition
(i) Large number of buyers and sellers
(ii) Homogeneous product
(iii) freedom of entry or exit
(iv) Perfect mobility
(v) Perfect knowledge
3.Price Line
The line plotted for different values of output in the output price plane is called price line.
In perfect competitive market for an individual firm price line and demand curve are same.
4. Revenue
It refers to the money receipts of a firm from the sale of its output.
5.Total Revenue (TR)
It is the sum total of revenue derived from the sale of all units of the commodity.
6.Average Revenue It is the revenue per unit output sold
7.Marginal Revenue:
It is the change in total revenue as a result of selling one more (or less) unit of output.
8.Shape of TR, AR, MR, curves in Perfect Competition
(i) Under Perfect Competition TR curve in an upward slopping straight line starting from the origin.
(ii) Under Perfect Competition AR and MR curve is same and J | to X-axis.
9.Profit
It is the difference between revenue and cost.
Profit = (ti) = Revenue – Cost
10.Break Even Point
Break even for a firm occurs when it is able to cover its all costs of production.
Accordingly, break- even point is defined as a situation when T’R- TC or AR- AC
Under this situation, the firm earns only normal profits.
11.Shutdown Point It occurs when firm is just able to cover its variable costs, increasing the loss of fixed cost of production.
Accordingly shut down point is defined as a situation when TR= TVC or AR- A VC
12.Producer Equilibrium or Profit Maximisation
A producer is said to be in equilibrium, when he maximises his profits or minimises his losses.
Condition of profit maximisation
(i) MR = MC
(ii) MC is rising or MC should cut MR from below.
13.Profit Maximisation in the Shurt-run under Perfect Competition
• Condition-1, MR- MC1 or AR- P
• Condition-2, MC curve should cut the MR- AR curve from below
• Condition-3, P>_ AYC
14.Short run Suppy Curve
The supply curve of a firm tells us the quantity of the product that a profit maximising firm is willing to produce at each possible price.
15. Meaning of Suppy
Supply means the amount of a commodity that firms are able and willing to offer for sale in the market in a given period of time and at a given price.
16. Supply Schedule
Tabular statements of relationship between price and supply of commodity is called supply schedule.
17. Supply Curve
Graphical presentation of relationship between price and supply of a commodity is called supply carve.
18. Market Supply Curve
The market supply curve for a commodity shows relationship between the price of a given commodity and quantity sellers are inclined to sell.
19.Determinant of Supply Curve
(i) Technological progress
(ii) Input price
(iii) Unit tax
20.Elasticity of Supply
It can be defined as a measure of the degree of responsiveness of quantity supplied to changes in the commodity’s own prices.
21.Measurement of Elasticity of Supply