The chapter "The Theory of the Firm Under Perfect Competition" provides an in-depth exploration of market structures, focusing on perfect competition. This chapter explains how firms operate under such market conditions, detailing their behavior and decision-making processes to achieve profit maximization.
Introduction to CBSE Class 12 Business Studies Chapter "The Theory of the Firm Under Perfect Competition - Introductory Microeconomics"
This chapter covers various essential topics, including:
- Characteristics of a Perfectly Competitive Market:
- A large number of buyers and sellers.
- Homogeneous products.
- Free entry and exit of firms.
- Perfect knowledge and information.
- No transportation costs.
- No advertising or promotional costs.
- Total Revenue, Market Price, and Quantity Sold:
- Total revenue is the product of the market price and the quantity sold.
- In perfect competition, firms are price takers, meaning they accept the market price as given.
- Price Line:
- A price line, or budget line, represents all combinations of two goods that can be purchased with a given income and prices.
- Total Revenue Curve for Price-Taking Firms:
- The total revenue curve for a price-taking firm is a straight line that slopes upward, passing through the origin, indicating that total revenue increases proportionately with quantity sold.
- Market Price and Revenue Relationships:
- Average revenue (AR) and marginal revenue (MR) are equal to the market price in a perfectly competitive market.
- Profit Maximization Conditions:
- Marginal cost (MC) must equal marginal revenue (MR).
- MC should rise after equating MR.
- In the short run, price should cover average variable cost (AVC).
- In the long run, price should cover average total cost (ATC).
- Supply Curve of a Firm:
- The short-run supply curve is the portion of the MC curve above AVC.
- The long-run supply curve is the portion of the MC curve above ATC.
- Effects of External Factors on Supply Curve:
- Technological progress shifts the supply curve to the right.
- Imposition of a unit tax shifts the supply curve to the left.
- Increase in input prices shifts the supply curve to the left.
Assignments for CBSE Class 12 Business Studies Chapter “The Theory of the Firm Under Perfect Competition – Introductory Microeconomics”
- Short Questions:
- Define a perfectly competitive market.
- Explain the concept of a price line.
- Describe the relationship between average revenue and market price.
- Long Questions:
- Discuss the characteristics of a perfectly competitive market.
- Explain how technological progress affects the supply curve of a firm.
- Analyze the conditions required for a firm to maximize its profit in a competitive market.
- Numerical Problems:
- Calculate total revenue, marginal revenue, and average revenue from given data.
- Determine the profit-maximizing output level using cost and revenue data.
- Compute the market supply schedule from individual firm supply schedules.
- Case Studies:
- Evaluate a real-world example of a firm operating in a perfectly competitive market.
- Analyze the impact of a new tax policy on the supply curve of a competitive firm.
Conclusion
The chapter “The Theory of the Firm Under Perfect Competition” equips students with a thorough understanding of how firms operate in a perfectly competitive market. It covers the principles of profit maximization, revenue relationships, and the impact of external factors on supply, providing a strong foundation in microeconomic theory.
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Questions and Answers for CBSE Class 12 Business Studies Chapter "The Theory of the Firm Under Perfect Competition - Introductory Microeconomics"
Q1: What are the characteristics of a perfectly competitive market?
- ANS: A perfectly competitive market has many buyers and sellers, homogeneous products, free entry and exit, perfect information, and no transportation or promotional costs.
Q2: How are total revenue, market price, and quantity sold related?
- ANS: Total revenue is the product of the market price and quantity sold. In perfect competition, firms take the market price as given.
Q3: What is a price line?
- ANS: A price line represents all combinations of two goods that can be purchased with a given income and prices.
Q4: Why is the total revenue curve of a price-taking firm an upward-sloping straight line?
- ANS: The total revenue curve slopes upward because total revenue increases proportionately with quantity sold. It is a straight line because the market price is constant.
Q5: Explain the relationship between market price and marginal revenue in a perfectly competitive market.
- ANS: In a perfectly competitive market, marginal revenue equals the market price.
Q6: What conditions must hold for a profit-maximizing firm to produce positive output in a competitive market?
- ANS: The conditions are MC = MR, MC should rise after equating MR, price should cover AVC in the short run, and price should cover ATC in the long run.
Q7: How does technological progress affect a firm’s supply curve?
- ANS: Technological progress shifts the supply curve to the right by reducing production costs and marginal cost.
Q8: What is the impact of a unit tax on the supply curve of a firm?
- ANS: A unit tax increases production costs, shifting the supply curve to the left.
