Short Run Equilibrium of the Firm Under Perfect Competition:
Definition and Explanation:
By short run is meant a length of time which is not enough to change the level of fixed inputs or the number of firms in the industry but long enough to change the level of output by changing variable inputs.
In short period, a distinction is made of two types of costs (i) fixed cost and (ii) variable cost.
The fixed cost in the form of fixed factors i.e., plant, machinery, building, etc. does not vary with the change in the output of the firm. If the firm is to increase or decrease its output, the change only takes place in the quantity of variable resources such as labor, raw material, etc.
Further, in the short run, the demand curve facing the firm is horizontal. No new firms enter or leave the industry. The number of firms in the industry, therefore, remain the same. Under perfect competition, the firm takes the price of the product as determined in the market. The firm sells all its output at the prevailing market price. The firm, in other words, is a price taker.
Equilibrium of a Competitive Firm:
The short-run equilibrium of a firm can be easily explained with the help of marginal revenue = marginal cost approach or MR= MC rule.
Marginal revenue is the change in total revenue that occurs in response to a one unit change in the quantity sold. Marginal cost is the addition to total cost resulting from the additional of marginal unit. Since price is given for the competitive firm, the average revenue curve of a price taker firm is identical to the marginal curve. Average revenue (AR) thus is equal to marginal revenue (MR) is equal to price (MR = AR = Price).
According to the marginal revenue and marginal cost approach or (MR = MC) rule , a price taker firm is in equilibrium at a point where marginal revenue (MR) or price is equal to marginal cost The point where MR = MC = Price,...