ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Education and Science»
  • Economics

Equilibrium Determination Under Perfect Competition Market

Updated on January 1, 2016
icv profile image

IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Source

Introduction

Perfect competition is a market structure where large number of buyers and sellers interact with each other to buy or sell their products. Here one of the most important features or assumptions is that all products are homogenous and they are perfectly substitutable. So market will determine a price and which remains constant further any single firm cannot change it. So, the firms or sellers are price takers, they can only change the quantity of output of their sales. This hub is briefly described about how equilibrium condition is determined in a perfectly competitive market.

Equilibrium point is one where the market is in the rest. Which means the condition of both the buyers (demand) and sellers (supply) will be equal. When we observe a firm in a perfectly competitive industry, the firm can survive only when they earn profit or at least their revenue which is equal to cost. Under the perfect competition market, price curve will be a perfectly elastic one. Because sellers can adjust only their supply since the price is fixed. By assumption revenue curves (Average Revenue and Marginal Revenue) should be equals to price since price is fixed. Further cost curves will have ‘U’ shapes as explained in the traditional theory of cost.

Equilibrium on the Basis of Time

In modern economics time is a very important element. Mainly time can be classify in to two, they are

a) Short period and

b) Long period

Short period refers to a condition where there is no any possibility to change fixed or long run factors of production like land and building. So, if a firm wants to change their output they can only vary short run or variable factors like labor, power and fuel etc.

On the other side long period refers to a condition in which all the factors can change irrespective of fixed or variable inputs. The firm can vary both the inputs in accordance with their expansion and contraction requirements in output.

Short Run Equilibrium of a Firm and Industry

An industry will be in equilibrium when there is no tendency to enter new firms or exit of the existing firms. Which means all the existing firms earns normal profits only. Further an industry will be in equilibrium when the following conditions are satisfied.

i) Marginal Cost = Marginal Revenue or (MC=MR)

ii) Average Cost = Average Revenue or (AC=AR)

See the following PICTURE – I, which showing the equilibrium status of a firm and industry.

In a perfectly competitive market, firms are the price takers. So, market determines prices. In the above PICTURE – I represented two diagrams one for firms and the second for industry.

The industry will be in equilibrium at point ‘E’ where price is ‘P’. On the part of firms’ side at price ‘P’, Marginal Cost curve (MC) cuts Marginal Revenue curve (MR) from below and both are equal. Since, MC and MR equal at ‘F’ each firm will earn normal profits only.

Suppose at price level ‘P2’, where industry in equilibrium at point ‘E2’ and in the case of firms, at price ‘P2’ equilibrium is ‘G’, where Average Revenue (AR) is greater Average Cost (AC). So, firms will earn abnormal or super normal profits. On the other hand at price level ‘P1’, where industry in equilibrium at point ‘E1’, and the firms will be in equilibrium at point ‘H’. There AC is greater than AR, so the firms will suffer losses. The point ‘H’ is known as shut down point where AVC equals AR.

Long run Equilibrium of Firm and Industry

In long run each firms can change their inputs, both fixed and variable factors of production can be changed in accordance with their needs.

A perfect competitive industry will be in equilibrium when all individual firms are in equilibrium. Which means all firms earns normal profits. So, there is no possibility to enter a new firm to industry or exit by an existing firm from the industry. The price of output is determined by market which is common to all sellers. So, equilibrium of a firm and industry of a perfectly competitive market can be represented as showing in PICTURE - II.

In the above PICTURE – II each firm is in equilibrium at point A. where Marginal Cost (MC) = Marginal revenue (MR) and MC cuts MR from below as said above. And ‘B’ is the output and ‘P’ is the price.In the case of industry it reached in equilibrium at point ‘E’, where both demand and supply interact with each other or equal.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)