UGC NET COMMERCE July 2018 Q21
0. In a perfectly competitive market, a firm in the long run operates at the level of output where:
- Option : D
- Explanation : In the case of perfect competition, average revenue, AR being equal to the selling price, must be identical to MR curve for the same reason that the firm cannot influence price level. Now the unit profit level for the firm is given by AR = Min. AC.
The long-run equilibrium of the firm is now complete. Optimal output level is determined by equating MR = MC, in which case, the individual entrepreneur has no incentive to alter the optimal level of output.
Long-run ‘normal profits’ are now earned at, p = Min. AC, in which case there is no incentive for a firm to enter or leave the industry to which the firm belongs.
The concept of competition influencing price and output determination needs to be pointed out. If p > MC, then π > 0. This would induce other firms to enter the industry. Consequently, the total supply of output to the industry by all such firms will increase. Consequently, supply p will be driven down. On the other hand, if p < MC, then π < 0. Now firms will start to leave the industry. The supply of total output will decline. This will drive up price. Finally, with movements from both below and above MC values, the final value of price will be where, p = MC.
Because supply prices of output of a perfectly competitive firm are set in this way along the rising portion of the MC curve, this turns out to be the supply curve of the firm’s output.
Finally, with all the above results in the situation where the firm is a price-taker in perfect competition, we obtain the compressed result for pricing of output of a firm in perfectly competitive market:
p = MC = Min. AC = AR = MR
Such a firm is the most efficient one in terms of its minimum average cost of production, maximal output that earns the firm the full range of economies of scale, and maximal profits at this level that shows that the entire output is fully distributed among factors of production.
