Theory Of The Firm Under Perfect Competition - 1 - Free MCQ Practice Test

Pure or perfect competition is a theoretical market structure in which the following criteria are met:

• All firms sell an identical product (the product is a "commodity" or "homogeneous").
• All firms are price takers (they cannot influence the market price of their product). Market share has no influence on prices.

Globalization has had a significant and nearly instantaneous impact on India as a whole. The reduction of export subsidies and import barriers enabled free trade that made the untapped Indian market incredibly attractive to the international community.

Supernormal profit is defined as extra profit above that level of normal profit.
Here the firm earns profit of Rs. 2 over the cost occurred.

With loss minimization, price exceeds average variable cost but is less than average total cost at the quantity that equates marginal revenue and marginal cost.

In this case, the firm incurs a smaller loss by producing some output than by not producing any output.

The long-run equilibrium point for a perfectly competitive market occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point of the average cost (AC) curve.

Since they are the price takers and the price remains constant so does the AC of production.

In a monopolistic market, there is only one firm that produces a product. There is absolute product differentiation because there is no substitute.

• The marginal cost of production is the change in the total cost that arises when there is a change in the quantity produced.
• The marginal revenue is the change in the total revenue that arises when there is a change in the quantity produced a firm maximizes its total profit by equating marginal cost to marginal revenue and solving for the price of one product and the quantity it must produce.

Marginal revenue (MR) can be defined as additional revenue gained from the additional unit of output. Marginal revenue is the change in total revenue which results from the sale of one more or one less unit of output.
Formula:
Total revenue = TR
Total Unit = n
Total Unit less one unit = n-1
MR = TR_n -TR_n-1.

A rational consumer is considered to be that person who makes rational consumption decisions.

In other words, the consumer who makes his choices after considering all the other alternative goods (and services) available in the market is called a rational consumer.

Pure or perfect competition is a theoretical market structure in which the following criteria are met:
1. All firms sell an identical product (the product is a "commodity" or "homogeneous").
2. All firms are price takers (they cannot influence the market price of their product).
3. Market share has no influence on prices.
4. Buyers have complete or "perfect" information—in the past, present and future—about the product being sold and the prices charged by each firm.
5. Resources for such labor are perfectly mobile.
6. Firms can enter or exit the market without cost.

Producer’s equilibrium refers to the state in which a producer earns his maximum profit or minimizes its losses.

According to the MR-MC approach, the producer is at equilibrium when the Marginal Revenue (MR) is equal to the Marginal Cost (MC), and the Marginal Cost curve must cut the Marginal Revenue curve from below.

Two conditions under this approach are:

(i) MR = MC

(ii) MC curve should cut the MR curve from below, or MC should be rising.

Marginal Cost < Marginal Revenue means abnormal loss situation, where the total revenue of a business does not cover total cost incurred for the business, due to which the profits of the business are below normal limits.

If a firm makes more than normal profit, it is called super-normal profit. Supernormal profit is also called economic profit and abnormal profit and is earned when total revenue is greater than the total costs. 
Total profits = total revenue (TR) – total costs (TC)
Abnormal Profit = MR > MC

Producer's equilibrium refers to a situation where profits are maximised, i.e., the difference between total revenue and total cost is maximised, or in cases of losses, the difference is minimised, so as to minimise losses.

Regardless of the gradient of the linear supply curve or its position on the supply curve, the PES of a linear supply curve that passes through the origin is always equal to 1. Therefore, if the supply curve originates with P = 0 and Q = 0, the elasticity will always be 1.
Formula:
%Change in quantity / %change in price.

If supply is unit elastic, then each percentage increase in price results in exactly a 1 percent increase in the quantity supplied. This change is only possible when the slope equals 1 (which occurs with a 45-degree line) and starts at the origin.

Perfect competition is a type of market where there are many buyers and sellers, and all of them initiate the buying and selling mechanism. There are no restrictions and no direct competition in the market. It is assumed that all the sellers are selling identical or homogenous products.

AC = AR means the firm’s cost and revenue are equal which means the firm does not earn any profit or no loss, which means the firm is earning normal profit.

A firm is in equilibrium when it is satisfied with its existing level of output.

The firm wills, in this situation, produce the level of output which brings in the greatest profit or smallest loss. When this situation is reached, the firm is said to be in equilibrium.
Marginal cost should be equal to marginal revenue, then only the firm can be called at equilibrium.

Marginal revenue is the extra revenue generated when a perfectly competitive firm sells one more unit of output. The marginal revenue received by a firm is the change in total revenue divided by the change in quantity.

Perfect competition is a market structure with a large number of small firms, each identical selling goods. Perfectly competitive firms have perfect knowledge and perfect mobility into and out of the market. These conditions mean perfectly competitive firms are price takers, they have no market control and receive the going market price for all output sold.

Since they are the price takers and have no control over price but just the production, so even if they increase their quantity of production, still the price will remain constant and so does the marginal revenue.

Average revenue curve is often called the demand curve due to its representation of the product's demand in the market.

Each point on the curve represents the price of the product in the market. Price determines the demand for a product, hence Average revenue curve is also demand curve.
Assuming it is a perfect competitive market.