Economics | 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”

1. Short Questions:
   • Define a perfectly competitive market.
   • Explain the concept of a price line.
   • Describe the relationship between average revenue and market price.
2. 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.
3. 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.
4. 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.