class 12 eco theory of production and output determination

Theory of production and out put determination

Friday, September 17, 2021 5:17 PM

1)What is equilibrium of a firm ?

Equilibrium of a firm refers to the choice of level of output production that
maximum profit .According to the TR-TC approach firm will be equilibrium if
positive gap between TR and TC is maximum . According to the MR-MC
approach firm will be in equilibrium if
MR=MC and MC cut MR from the below .

2) Point out any two difference between firm and industry .

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3 what are two conditions for the equilibrium of firm under marginal
approach ?

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4 Why are firm under perfect competition market called price taker ?

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5 why does a firm under perfect competition earn normal profit in long
run ?

If the existing firms are earning excess profit new firm enter in to the industry . If
the existing firm are operating on loss for long time they shutdown .In this way
firm under perfect competition earn normal profit .

6 why the firm under monopoly market are called price maker ?

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7 point out any two similarities between perfect competition and
monopoly ?

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8 Mention any two difference between perfect competition and
monopoly market.

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9 when does a firm shutdown ?

firm will be shutdown if price equal to average variable cost (ie P= AVC) ,losses
equal to Total fixed cost and AVC equal to marginal cost .

10 how are price and output determined under perfect competition ? 5
marks

book page 350 Q 15

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Perfect competition

Friday, November 20, 2020 8:04 PM

How are price and output determined in the perfect competition market? .10 marks

Meaning of perfect competition
perfect competition is a market structure where there are large numbers of buyers and sellers in the
marker .The example of perfect competition market to some extent , is agriculture market where the
product are identical i.e. homogeneous
Features of perfect competition
• Large number of buyers and sellers
• Homogenous products are sold in the market.
• There is free entry and exist of the firms
• firms are called price takers
• there is free mobility of factors of production
• no transportation costs.

price and output determination
in perfect competition market , industry determines the equilibrium price and output with the help of
market forces(demand and supply). All the firms follow the same price . There are two approaches to
explains the equilibrium of firm they are described below.
Total Revenue (TR) -total cost (TC) approach
This approach uses TR and TC curve to determines the profit maximizing output and equilibrium of
firm. TR-TC approach is drawn below

In the figure, TR and TC are total cost and total revenue curves The firm is in equilibrium at Q1 level of
output for which TR exceed the TC by greatest amount . Two shaded part represents loss. Point 'a'
and 'b' denotes break even points.

Marginal revenue(MR)=marginal cost(MC) approach
Under marginal approach , MR and MC are consider to determine the equilibrium of firm. For the
equilibrium of firm the following two condition must be fulfilled
→ First order conditions : marginal revenue = marginal cost

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→ First order conditions : marginal revenue = marginal cost
→ Second order conditions : MC must cut MR from below

Short-run equilibrium :
Due to different cost structures , the firm may be equilibrium in short -run with:
→ Excess profit if AR > AC
→ Normal profit if AR =AC
→ loss if Ac > AR

The short run equilibrium of industry and firm under perfect competition are given below.

Fig:'a' fig: 'b' fig:'c' fig: 'd'

Figure 'a' shows the equilibrium of industry at point E .The equilibrium price and output are 'P' and 'Q'
respectively .
Figure 'b' shows short -run equilibrium of firm with excess profit .The equilibrium point is e1 from the
figure,
Per unit revenue (AR)=Q1e1
Per unit cost(AC)=BQ1
per unit profit=e1B
total excess profit= shaded area (ABe1P)

Figure 'c' shows the equilibrium of firm with normal profit due to AC=AR=e2Q2

Figure 'd' shows the equilibrium of firm with loss
Here
Per unit revenue (AR)=Q3e3
Per unit cost(AC)=Q3B1
per unit loss=e3B1
Total loss= shaded area=Pe3B1A1

Long-run equilibrium : in the long run the firm will be equilibrium with normal profit relating to figure
'a' and figure 'c' as drawn above with flatter cost curves.

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monopoly 8:03 PM

Friday, November 20, 2020

How are price and output determined under the monopoly market ? 8 marks
Meaning of monopoly
The word monopoly is formed with two words mono and poly which means single seller. The
best example of monopoly in Nepal are Nepal oil corporation ,Nepal Electricity Authority
Features of monopoly
→ Single seller and large number of buyers.
→ No close substitute goods
→ Firms are price maker
→ Strong barriers to entry for new firms
→ profit maximization.

price and output determination
in monopoly market ,there is no difference between industry and firm . There are two
approaches to explains the equilibrium of firm. They are described below.
Total Revenue (TR) -total cost (TC) approach
This approach uses TR and TC curve to determines the profit maximizing output and
equilibrium of firm. TR-TC approach is drawn below

In the figure, TR and TC are total cost and total revenue curves The firm is in equilibrium at Q2
level of output for which TR exceed the TC by greatest amount . Two shaded part represents
loss. Point 'a' and 'b' denotes break even points.
Marginal revenue(MR)=marginal cost(MC) approach
Under marginal approach , MR and MC are consider to determine the equilibrium of firm. For
the equilibrium of firm the following two condition must be fulfilled

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the equilibrium of firm the following two condition must be fulfilled
→ First order conditions : marginal revenue = marginal cost
→ Second order conditions : MC must cut MR from below

Short-run equilibrium :
Due to different cost structures , the firm may be equilibrium in short -run with:
→ Excess profit if AR > AC
→ Normal profit if AR =AC
→ loss if Ac > AR

Short run equilibrium of monopoly firm is explained using following figure

Fig (I) equilibrium of monopoly fig(ii) equilibrium of monopoly fig(iii)equilibrium of monopoly
With excess profit with normal profit with loss

In the above figure , output is shown on x-axis and price cost and revenue on Y- axis .Monopolist is a
price maker so AR and MR are downward sloping .The curves denoted by SAC,SMC, are short run
average cost curve, short run marginal cost curve.
fig (i) shows that monopoly is operating in excess profit .from the figure,
Per unit revenue (AR)=DQ1
Per unit cost(AC)=BQ1
per unit profit=DB
total excess profit= shaded area (ABDP)

Figure (ii)shows the equilibrium of firm with normal profit due to AC=AR=DoQ2

Figure (iii) shows the equilibrium of firm with loss
Here
Per unit revenue (AR)=D1Q3
Per unit cost(AC)=B1Q3
per unit loss=B1D1
Total loss= shaded area=A1B1D1P3

Long-run equilibrium :
monopolist is in equilibrium if it earn excess profit .so in long run monopolist earn excess

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monopolist is in equilibrium if it earn excess profit .so in long run monopolist earn excess
profit and figure is similar to fig(I) with flatter curve .
Solve Questions page 111
Q 7 Q 9 Q 10

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