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While we are dealing with perfect competition, it is necessary that we keep the concept of firm and an industry separate. A firm refers to an individual enterprise while an industry refers to a group of competing firms which are selling a well-defined product.
Understanding the difference may sometimes be complex and students of Economics may require help in homework while they are working on the concepts on their own.
Equilibrium of the Industry or Price Determination, that is required to be understood when one is taking assignment help: –
Under perfect competition, no single consumer or single firm has the power to influence the market price due to the negligible share it has in total demand or total supply of the industry.
However, the determination of the price can be done through the collective actions of all the firms which are inside the industry, with the help of the supply curve of the industry or through the industry’s demand curve.
Industry achieves its equilibrium in short-run at that point where demand for industry’s product is equal to the supply of its product.
There will be a situation of excess of supply if the price is above equilibrium price, which will pull down the price. Contrarily, if the price is below equilibrium price, there will be a situation of excess of demand due to which the prices would rise.
There is neither excess of demand nor excess of supply at equilibrium, therefore there is no scope for the prices to rise or to fall.
We also need to understand the concept of equilibrium of the firm in the short-run, for effective assignment help: –
The firm is considered to be a price-taker. It is assumed that the individual firm in perfect competition faces perfectly elastic demand for its product. It is also assumed that the total supply and the market price is zero because of any variation in its output over the range feasible for it.
The price which is determined in the industry with the help of the forces of market supply and market demand, is given to all the firms. Demand is said to be perfectly elastic, does not mean that the firm can sell an infinite amount of goods at this given price.
It simply means that variation in production which is feasible for it to make will not have any effect on the price. The firm does not need to reduce the price in order to sell more. Also, if the firm charges more than the market price, it cannot sell anything. Thus, a firm which is said to be a price-taker, always sells at market price.
If we combine the short-run cost curve with the demand curve faced by the firm, the short-run equilibrium of the firm can be determined. To maximize its profits, a firm being a price-taker has to decide the amount of output it should produce at the given price.
Hence, the firm is considered to be an output-adjuster under perfect competition. The firm has to meet two types of conditions if it wants to determine the profit-maximizing output, the conditions are as follows:
- The first condition for the firm to be in short-run equilibrium is that the short-run marginal cost is equal to the marginal revenue and the short-run marginal cost curve cuts the marginal revenue curve from below. This is known to be the profit-maximization rule.
- A firm under perfect competition might earn normal profit or incur losses or just earn supernormal profits, while maximizing its profits. Whether a firm earns normal profits or incur losses or earns abnormal profits, depends upon its revenue conditions.
- A firm in short-run will be in equilibrium if average revenue is greater than or equal to short-run average cost. The firm will earn supernormal profits or abnormal profits if average revenue is greater than short-run average cost.
- The firm will incur losses if average revenue is less than short-run average cost. The firm will earn only normal profits if average revenue is equal to short-run average cost.
Equilibrium of the firm in the long-run: –
Under perfect competition, a firm will be in long-run equilibrium when it is only earning normal profits. The free entry of the firm in the industry and the free exit of the firm from the industry is the key point for the firm to be in long-run equilibrium.
It will also ensure that the firm is earning only normal profits and nothing else. In the short-run, if the firm is earning profits or incurring losses, it would simply give the signal to the resource owners to wither enter into the industry or leave the industry.
If in the short-run the existing firms are earning super normal, then they would attract the new resources into the industry in the form of new firms which will enter the industry so that they can earn abnormal profits. This will increase the total supply of the industry.
Consequently, there will be a rightward shift in the supply curve of the industry. The unchanged market demand curve will lead to fall in the equilibrium price as a consequence of the rightward shift of the supply curve in the industry. With the fall in the price, the abnormal profits will also fall.
The new firms will continue to enter into the industry until the market price has been sufficiently driven down due to increased supply so that all the abnormal profits are eliminated and all the firms in the industry start earning normal profits only which means just to cover their total costs.
Likewise, if there is a leftward shift in the supply curve, the market prices which will be the cause for the firm to continue to exit and the price will continue to rise until all their costs are covered by the remaining firms in the industry, that is earning only normal profits.
Therefore one can refer to the above points for effective help in homework in Economics.
