Economics · Chapter 4
Study notes aligned to the official NEB syllabus.
The price and output that a firm finally settles on depend on the market structure in which it operates. A firm is in equilibrium when it produces that level of output at which its profit is maximum, and it has no tendency to increase or decrease its output. This chapter explains how price and output are determined under perfect competition and under monopoly, in both the short run and the long run, and compares the two.
A firm is a single production unit, whereas an industry is the group of all firms producing the same or similar product. The equilibrium of a firm is the position of maximum profit. There are two conditions for the equilibrium of a firm. The first or necessary condition is that marginal cost must equal marginal revenue.
$$MC = MR$$
The second or sufficient condition is that the marginal cost curve must cut the marginal revenue curve from below, that is, MC must be rising at the point of equilibrium. If only the first condition is met at a point where MC is falling, profit is not yet at its maximum.
Under perfect competition the firm is a price taker. The industry fixes the price by the interaction of total demand and total supply, and each firm accepts that price. For the firm, price equals average revenue equals marginal revenue, so the equilibrium condition becomes:
$$ \begin{aligned} MC &= MR \ &= AR \ &= P \end{aligned} $$
The price and output that a firm finally settles on depend on the market structure in which it operates. A firm is in equilibrium when it produces that level of output at which its profit is maximum, and it has no tendency to increase or decrease its output. This chapter explains how price and output are determined under perfect competition and under monopoly, in both the short run and the long run, and compares the two.
A firm is a single production unit, whereas an industry is the group of all firms producing the same or similar product. The equilibrium of a firm is the position of maximum profit. There are two conditions for the equilibrium of a firm. The first or necessary condition is that marginal cost must equal marginal revenue.
The second or sufficient condition is that the marginal cost curve must cut the marginal revenue curve from below, that is, MC must be rising at the point of equilibrium. If only the first condition is met at a point where MC is falling, profit is not yet at its maximum.
Under perfect competition the firm is a price taker. The industry fixes the price by the interaction of total demand and total supply, and each firm accepts that price. For the firm, price equals average revenue equals marginal revenue, so the equilibrium condition becomes: