SHORT RUN AND LONG RUN EQUILIBRIUM OF FIRM UNDER PERFECT COMPETITION

• EQUILIBRIUM OF FIRM  UNDER PERFECT COMPETITION PART 1
  
  
• MICRO ECONOMICS/BUSINESS ECONOMICS
• SHASHI AGGARWAL ECONOMICS AND LAW CLASSES
• IMPORTANT QUESTION
• EXPLAIN THE FIRM'S SHORT RUN AND LONG RUN EQUILIBIRUM UNDER PERFECT COMPETITION
• ANSWER :

1. MEANING OF PERFECT COMPEITION
2. CONDITIONS OF EQULIBRIUM IN BRIEF
3. SHORT RUN EQULIBIRUM ( SNP,NP AND MINIUM LOSSES
4. LONG RUN EQULIBIRIUM

• MEANING OF PERFECT COMPETITION

1. PERFECT COMPETITION IS THAT SITUATION OF THE MARKET WHEREIN THERE ARE LARGE NUMBER OF BUYERS AND SELLERS OF A HOMOGENEOUS PRODUCT AND THE PRICE OF SUCH PRODUCT IS DETERMINED THE  MARKET FORCES I.E THE INDUSTRY. ALL FIRM THE SELL THE PRODUCT AT  SAME PRICE WHICH IS FIXED BY INDUSTRY.
2. MEANING OF FIRM’S EQUILIBRIUM
3. WATSON,” A FIRM IS A UNIT ENGAGED IN THE PRODUCTION FOR SALE AT A PROFIT AND WITH THE OBJECTIVE OF MAXIMIZING THE PROFIT.
4. FIRM’S EQUILIBRIUM:-A FIRM IS IN EQUILIBRIUM WHEN IT IS SATISFIED WITH ITS EXISTING AMOUNT OF OUTPUT.A FIRM IN EQUILIBRIUM HAS NO TENDENCY TO INCREASE OR DECREASE OUTPUT. NEITHER EARNING SUPERNORAML PROFIT OR NORMAL LOSS.
5. HANSON,” A FIRM WILL BE IN EQUILIBRIUM WHEN IT IS OF NO ADVANTAGE TO INCREASE OR DECREASE OUTPUT.

• CONDITIONS

1. MAXIMUM PROFIT:- PROFIT =TR-TC SHOULD BE MAXIMUM
2. MC =MR AND MC CURVE MUST CUTS MR FROM BELOW
3. THE ABOVE CONDITIONS ARE JUDGED IN THE FORM:
4. TOTAL REVENUE AND TOTAL COST APPROACH
5. MARGINAL REVENUE AND MARGINAL COST
6. TOTAL REVENUE AND TOTAL COST APPROACH
7. A FIRM IS IN EQUILIBRIUM WHEN IT IS EARNING MAXIMUM PROFIT
8. PROFIT = TR-TC. IT PRODUCES THE OUTPUT WHERE IT IS DIFFERENCE BETWEEN TOTAL REVENUE AND TOTAL COST IS MAXIMUM

• TOTAL REVENUE AND TOTAL COST APPROACH

• EXPLANATION
• AT Q1 OUTPUT THE FIRM IS GETTING MAXIMUM PROFIT AND IS IN EQUILIBRIUM. AS THE FIRM IS GETTING MAXIMUM PROFIT
• MARGINAL REVENUE AND MARGINAL COST

• EXPLANATION
• AT POINT MC CUTS MR FROM THE ABOVE AND MARGINAL COST IS EQUAL TO MR AT THIS POINT. IT INDICATES THAT FIRM PRODUCES Q1 UNITS OF OUTPUT AND IF THE FIRM INCREASES TO Q AND THEN MC WILL BE LESS AND IT WILL ADD TO THE PROFITS OF THE COMPANY. AT E POINT IT SATISFIES BOTH THE CONDITION:
• MC= MR =NECESSARY CONDITION BUT SUFFICIENT CONDITION IS MC MUST CUT MR FROM BELOW.
• SHORT PERIOD EQUILIBRIUM

1. THE SHORT IS DEFINED TO THAT PERIOD OF TIME IN WHICH AT LEAST ONE OR FIRM’S SOME FACTORS ARE FIXED AND SOME ARE VARIABLE
2. SHORT RUN REFERS TO PERIOD OF TIME TOO BRIEF TO PERMIT AN ENTERPRISE TO ALTER ITS PLANTS CAPACITY YET LONG ENOUGH TO PERMIT A CHANGE IN THE LEVEL AT WHICH FIXED PLANT IS UTILIZED,
3. OUTPUT CAN BE INCREASED ONLY UP TO THE EXISTING PLANT CAPACITY
4. SHORT PERIOD
5. IN THE SHORT RUN THE FIRM MAY  EARN:-
6. SUPER NORMAL PROFIT WHEN AR>AC
7. NORMAL PROFIT AR=AC
8. MINIMUM LOSSES WHEN AR IS LESS THAN AC

• DETERMINATION OF SHORT RUN EQUILIBRIUM OF THE FIRM
• SUPER NORMAL PROFITS
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• DETERMINATION OF SHORT RUN EQUILIBRIUM OF THE FIRM
• NORMAL PROFIT
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• HERE THE FIRM IS GETTING NORMAL PROFIT AS E POINT AR = AC
• MINIMUM LOSS
• IN THE SHORT PERIOD A FIRM CAN INCUR MINIMUM LOSS WHEN THE AC IS MORE THAN PRICE AND PRICE IS MORE THAN AVC OR EQUAL TO AVC. BECAUSE IN THE SHORT RUN IF THE FIRM DISCONTINUE ITS PRODUCTION AND IT WILL INCUR LOSSES TO THE TUNE OF FIXED COST. IF TH FIRM IS GETTING PRICE =AVC IT WILL CONTINUE IT IS ALSO KNOWN AS SHUT DOWN POINT. AND IF PRICE FALL BELOW IT IS BETTER FIRM DISCONTINUE ITS PRODUCTION
• MINIMUM LOSS
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1. EXPLANATION OF MINIMUM LOSS
2. A FIRM IS IN EQUILIBRIUM MAY INCUR MINIMUM LOSS WHEN THE AVERAGE COST OF EQUILIBRIUM OUTPUT IS MORE THAN PRICE DETERMINED BY THE INDUSTRY BY AN AMOUNT EQUAL TO FIXED COST WHEN AR=AVC
3. EVEN IF THE FIRM DISCONTINUE IT PRODUCTION IN THE SHORT RUN ,WILL HAVE TO BEAR THE LOSS OF FIXED COST
4. AR IS LESS THAN AVC THE FIRM WILL PREFER TO SHUT DOWN
5. PRICE =10
6. FC=5
7. AVC= 9
8. SECOND SITUATION WHEN AVC IS 11

• LONG RUN
• LONG RUN PERIOD IS THAT PERIOD IN WHICH THE PRODUCERS GET SUFFICIENT TIME TO ADJUST THEIR SUPPLIES ACCORDING TO CHANGED CONDITIONS. NEW FIRMS CAN ENTER AND OLD FIRM CAN LEAVE. IF THERE IS SNP MANY FIRMS WILL ENTER AND SUPPLY WILL INCREASE AND EVERY FIRM WILL GET NORMAL PROFIT AND IN CASE OF LOSS, MANY FIRMS WILL LEAVE AND THE REMAINING FIRM WILL GET NORMAL PROFIT.
• LMC=MR=AR=MINIMUM LAC AND THE OUTPUT WILL BE OPTIMUM OUTPUT
• LONG RUN EQUILIBRIUM
• D