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Introduction
In a perfectly competitive market, a firm cannot change the price of a

product by modifying the quantity of its output. Further, the input and cost
conditions are given.
Therefore, the firm can alter the quantity of its output without changing the
price of the product. We know that a firm is in equilibrium when its profits are
maximum, which relies on the cost and revenue conditions of the firm.
These conditions can vary in the long and short-term. Before we take a look
at the equilibrium states, let’s look at the demand curve of a product under
perfect competition.
Demand Curve of a Product in a Perfectly Competitive Market
Let’s derive the firm’s demand curve with the help of the market’s demand
and supply curve. In perfect competition, the equilibrium of the market’s
demand and supply determines the price.
In the figure above, Price is on the Y-axis and Quantity on the X-axis. The left
side of the figure represents the industry and the right side the case of a
firm. The market demand curve is DD and the market supply curve is SS.
Further, the point at which the market’s demand and supply curves intersect
each other is the equilibrium point. The price at this level is the equilibrium
price and the quantity is the equilibrium quantity.
All firms receive this price in a perfectly competitive market. Also, firms are
the price-takers and the industry is the price-maker. The Average Revenue
(AR) Curve is the demand curve of the firm as it can sell any quantity it
wants at the market price.
Short-run Equilibrium of a Competitive Firm
In the short-run, there the following assumptions:
The price of the product is given and the firm can sell any quantity at that
price
The size of the plant of the firm is constant
The firm faces given short-run cost curves
We know that the necessary and sufficient conditions for the equilibrium of a
firm are:
MC = MR
MC curve cuts the MR curve from below
In other words, the MC curve must intersect the MR curve from below and
after the intersection lie above the MR curve. In simpler terms, the firm must
keep adding to its output as long as MR>MC.
This is because additional output adds more revenue than costs and
increases its profits. Further, if MC=MR, but the firm finds that by adding to
its output, MC becomes smaller than MR, then it must keep increasing its
output.
Since it is a perfectly competitive market, the demand for the product of the
firm is perfectly elastic. Further, it can sell all its output at the market price.
Therefore, its demand curve runs parallel to the X-axis throughout its length
and its MR curve coincides with the AR curve.
Three Possibilities in Short-run
In a perfectly competitive market, a firm can earn a normal profit, super-

normal profit, or it can bear a loss. At the equilibrium quantity, if the average
cost is equal to the average revenue, then the firm is earning a normal profit.
On the other hand, if the average cost is greater than the average revenue,
then the firm is bearing a loss. However, if the average cost is less than
average revenue, then the firm is earning super-normal profits.
Normal Profit
In the above figure, costs and revenue are on the Y-axis and the Quantity is
on the X-axis. Further, marginal costs cut the marginal revenue curve from
below at point A. At point ‘A’, P is the equilibrium price and ‘Q’ is the
equilibrium quantity.
Note that corresponding to the equilibrium quantity, the average cost is

equal to the average revenue. It also means that the firm is earning a normal
profit.
Loss
In the figure above, the cost and revenue curves are on the Y-axis and the
quantity demanded is on the X-axis. Further, the marginal cost curve cuts the
marginal revenue curve from below at point ‘A’, the equilibrium point.
Corresponding to point ‘A’, P* and Q* are the equilibrium price and quantity
respectively. Also, corresponding to Q*, the average cost is more than the
average revenue.
In this case, the per unit cost of OQ* (average cost) is more than the per unit
revenue of OQ* (average revenue). As per the figure, the per unit revenue is
OP and the per unit cost is OP’. this means that the per unit loss is PP’. Also,
the total loss on quantity OQ* is P*P’BA.
Super-normal Profit
In the figure above, the per unit revenue or average revenue is OP* while the
per unit cost or average cost is OP’. Therefore, the per unit receipts are high
in comparison with the per unit cost.
That’s why the average revenue curve lies above the average cost curve
corresponding to Q*. The firm is earning super-normal profits. The per unit
profit is P’P* and the total profit is for quantity OQ* is P’P*BA.

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Introduction

In a perfectly competitive market, a firm cannot change the price of a

Demand Curve of a Product in a Perfectly Competitive Market

In the short-run, there the following assumptions:

The size of the plant of the firm is constant

The firm faces given short-run cost curves

MC curve cuts the MR curve from below

In a perfectly competitive market, a firm can earn a normal profit, super-

Note that corresponding to the equilibrium quantity, the average cost is

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