Skip to main content

Equilibrium of the Firm in the Short Run (With Diagram)

MEANING OF A FIRM EQUILIBRIUM

The concept of a firm equilibrium occupies an important place in price theory. A firm is in equilibrium when it has no incentive either to expend or to contract it output. A firm would not like to change its level of output when its total profits are maximum. The rational entrepreneur will expand output if he thinks he can increase his total profit by doing so or vice versa. Therefore a firm is in equilibrium position when it is earning maximum profits. The equilibrium of the firm is usually discussed in two stages via Short Run and Long Run.

FIRM’S EQUILIBRIUM UNDER SHORT RUN

Short Run has been defined as a period of time long enough to allow the firm to adjust its output by increasing or decreasing the amount of variable of a factor of production i.e. Land and Labor, but during which factor of production cannot be altered. Why Average Revenue and Marginal Revenue is horizontal straight line. 
Under perfect competition, for an individual firm price is given. It works under the assumption that it can sell as much as it likes, at the prevailing price. Therefore the demand or average revenue curve facing the firm is perfectly elastic at the ruling price and addition made to the total revenue by marginal revenue is equal to the price (average revenue) of the commodity. Therefore the average revenue or demand curve and marginal revenue curve would coincide with each other for a firm under perfect competition.
FIRM’S EQUILIBRIUM UNDER SHORT RUN

In the above diagram, if price is prevailing in the market is OP, and then PL is both the average and marginal revenue curve. Profits are largest when MC=MR and Marginal Cost cut the Marginal Revenue curve from below rather than above. Point E in the diagram is a point where a firm can get maximum profit. Therefore (condition of firm’s equilibrium) under perfect competition.
  • MC = MR = PRICE 
• MC curve must cut MR curve from below. In short run there are three possibilities which tell about the absolute profit or loss position of the firm.

• When the firm makes Super Normal Profit
• When the firm makes only Normal Profit
• When the firm incurs Losses  

• When the firm makes Super Normal Profit

When the firm makes Super Normal Profit


In the above diagram the price prevailing in the market is OP, the marginal cost curve cut the marginal revenue curve at point E where the firm is in equilibrium position. In this equilibrium position the firm is making Super Normal Profit. There will be tendency for a new firm to enter into the industry to compete, so the existing firm will continue to earn super normal profit. 
Condition for Average Super Normal Profit = Average Revenue > Average Cost

Area Covered in Average Revenue = EQ 
Area Covered in Average Cost = EoQ 
Area for Super Normal Profit = EQ is greater than EoQ 
If, we deduct EQ – EoQ = Average Super Normal Profit (EEo)


• When the firm makes only Normal Profit

When the firm makes only Normal Profit


In the above diagram the price prevailing in the market is OP, the marginal cost curve cut the marginal revenue curve at point E where the firm is in equilibrium position. In this equilibrium position the firm is making Normal Profit. 
Condition for Average Normal Profit = Average Revenue = Average Cost 
Area Covered in Average Revenue = EQ 
Area Covered in Average Cost = EQ 
Area for Super Normal Profit = EQ is equal to EQ 
If, we deduct EQ – EQ = Average Normal Profit (EQ) 

• When the firm incurs Losses  
When the firm incurs Losses
In the above diagram the price prevailing in the market is OP, the marginal cost curve cut the marginal revenue curve at point E where the firm is in equilibrium position. In this equilibrium position the firm is making Super Normal Profit. There will be tendency for a new firm to enter the industry to compete, so the existing firm will continue to earn super normal profit. 
Condition for Loss = Average Revenue < Average Cost 
Area Covered in Average Revenue = EoQ 
Area Covered in Average Cost = EQ 
Area for Super Normal Profit = EQ is greater than EoQ 
If, we deduct EQ – EoQ = Average Loss (EEo).

Comments

Popular posts from this blog

Free Download Notes XI & XII Commerce Notes & Book In Pdf

Free Download Notes XI & 1st Year Notes Download In Pdf XI Accounting Book  Economics Notes Pdf Free Download Urdu Notes for 1st Year (Class 11)  Another Urdu Notes For XI  Islamiat For XI  Principle Of Commerce 1st year XI POC Notes (Best) Server 01 XI POC ( Principle of Commerce ) Guess Paper Solved 2021 Free Download Notes  XII Commerce Notes & Book In Pdf XII Accounts Book With Solutions 2nd-year Urdu Notes Free Download Pdf XII English Notes Pdf 2nd Year English Notes Adam jee  2nd Year Commercial Geography  2nd Year Pak Studies Notes XII Pak Studies Notes In English Adam Jee XII Pak Studies Solved Paper XII Banking Notes (Shah Commerce) Another 2nd Year Banking Notes XII  CG Solved Papers Commerce Online Notes By Sir sultan hamid hussain (All credit goes to Sir Sultan) Server 01 Commercial Geography Notes In English By Sir Sultan Server 01 Commercial Geography Notes Notes In Urdu By Sir Sultan Server 01 XII Banking Notes Short Q

Questions And Answers The Count’s Revenge By J.H.Walsh

THE COUNT’S REVENGE (J.H.WALSH) Q: 1 What Arab custom is referred in the short play “The Count’s Revenge”? An Arab custom mentioned by the Countess of Morcerf to Albert and the Count of Morcerf when the count of Monte Cristo leaves their house without eating anything. The custom runs as “Never to eat food at the house of a deadly enemy”. She strongly believes that since the Count of Monte Cristo has a faith in that custom and thinks them to be his enemy, and hence not eat anything at their place.   Q: 2 What do you know about the reaction, plans or intention of Albert? Albert, the brave young son of the count of Morcerf, was deeply shocked by the disgrace of his father and family. As a man of honour, he showed severe emotional reaction to the unhappy incident. Albert made his mind to trace about the unknown enemy of his family and avenge the family honour. On his request, Beauchamp, a close friend of Albert, discovered the name of the enemy. It was Albert;s

English Essay Problems of Karachi

Problems of Karachi Karachi is the biggest city in Pakistan and one of the most thickly populated cities in the world. Its population has increased rapidly and accordingly has given rise to many social problems. People of this metropolis are becoming more and more concerned about solving these serious problems, some of which are discussed below. The ever-increasing rush of heavy traffic on the roads is resulting in heavy loss of human life. One day or the other, people suffer from accidents due to reckless driving. Some lose their vehicles and some go to the police. This is due to lack of civic sense in the citizens and violation of traffic rules. Traffic jams, road quarrels, untidiness and damage of public property are also the results of this problem. The government has not done any planning to control this situation in the past two decades. In the same manner, the government has never emphasized upon population distribution. As a result, slum areas are rapidly being built, wher

Short Questions Answers of The Prisoner of Zenda ~Drama Novel Prisoner of Zenda

 N OVEL Question 1)Tell in your own words how the first meeting came off between the two distant cousins? Answer) Rudolf leaves the inn one day as he is given an opportunity to stay at Jahan’s sister at Strelsau. Instead of going, he decides to walk through the forest and have a look at the castle of Zenda. He sits down in the forest to have some rest as well as smoke a cigar. After smoking his cigar, he unintentionally falls asleep. Shouts and sound of laughter wake him up. On opening his eyes, he sees two men standing near him. They are Fritz Von Tarlenheim and Colonel Sapt. They tell him that he looks exactly like their king except that he has a beard. At that moment King Rudolf appears. Rassendyll greatly surprises to see king Rudolf in the forest of Zenda. He gives a cry when he finds that Rudolf is just like him. Rudolf’s face and appearance are quite like his own. Rudolf’s height appears to be slightly less than his. Rassendyll bows respectfully before the king. In a happy m