Question

The diagram shows one of the short run equilibrium situations of a firm under perfect competition.

1. List out any four features of such market condition. 

2. Identify the equilibrium situation of the firm profit, normal profit, loss diagrammatically. Show a situation in which the firm makes a profit. 

3. With the help of a diagram explain the long run situation of a firm under perfect competition.

Answer 1

1. Market Conditions: 

• Large number of sellers 
• Homegeneous product 
• Firm is a price taker 
• Free entry and exit 

2. The firm is making a normal profit. The firm produces ‘oq’ level of output and charges a price ‘op’. The shaded area in the diagram shows profit

3. Firm under perfeert competition in the long run makes only normal profit. This is because if firms are making profit, new entrants will be attracted into the industry.

The price falls due to increase in supply and the extra profit will be taken away. If the firms are making loss some of them will leave the industry, price rises and the loss will be turned into profit. This is shown in the diagram below.

The firm under perfect competition in the long run will produce ‘oq’ level of output and charges a price ‘op’.