Conditions of Equilibrium .

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Conditions of Equilibrium .
Under perfect competition. as explained earlier, price for all individual finn is even. It cannot influence
the price by its own action. It works under the assumption that it can sell as much as it likes, at the prevailing price. Therefore, the demand curve or average revenue curve fairing a linn under perfect competition is )elastic at the ruling price. Since a perfectly competitive firm can sell as much as it wants without affecting the price, addition made to total revenue by an extra unit of output, i.e., marginal revenue, is equal to the price (average revenue) of the commodity. Hence, the a\’l’l”agc revenue [nr dcma mil) curve, (AI{) lIllIl marginal revenue cline (I\IR) must coincide with each other fur a firm under perfect competition.

In hg. 2.’i.I, if price prevailing in the market is 01′. then PI. is both the average and marginal revenue curve. ~vtC is the marginal cost curve. It may be noted thai. under perfect competition, a firm’s Me curve is also its supply curve. Given the price 01′, the firm will fix its output where its profits arc maximum. Profits arc the grcar cst at the level of output for which marginal

cost is equal to marginal revenue and marginal cost curve cuts the marginal revenue curve from below.
As explained in the previous Chapter (Fig. 24.3). at point T though Me is equal to MR but Me is cutting
MR from above rather than from below. Therefore, T cannot be a position of equilibrium. At point R
ur output OM, the marginal cost equals MR and marginal CLJ~t curve is also cutting MR curve from below. Hence, at the output OM or point R, thc profits would . be maximum and the firm would be in equilibrium position. Marginal cost, which is equal to marginal revenue in equilibrium, must also be equal to price in equilibrium under perfect competition. since price and marginal revenue are equal under perfect competition. Hence, conditions of firm’s equilibrium under perfect competition are (il Me = MR = Price. Iii) Me curve must cut MR curve from below. Thus, a perfectly competitive finn will adjust its output at the point where its marginal cost is equal to marginal revenue or price, and marginal cost curve cuts the marginal revenue curve from below. But producing at this point does not guarantee that the firm will always make positive profits. Whether or nut there arc positive profits depends on the rquinn between total cost and total revenue. or between average cost and average revenue (price).

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Conditions of Equilibrium .