Chapter 4: The Theory of Firm under Perfect Competition

No, for a profit-maximising firm which is operating in a competitive market, producing a positive level of output in the long run with the condition of market price less than AC (Average Cost) is not possible due to the reason that in the long run, there will be free entry and exit of firms and all firms will be earning normal profit. Therefore, a firm will be making losses if the market price falls below average cost, and in this condition, the firm needs to stop production.

A firm which is perfectly competitive will have a supply curve that is the summation of the upward-sloping part of the short-run marginal cost (SMC) when the minimum average variable cost is more than or equal to it and the vertical part of the price axis in a situation where the price is less than the minimum average variable cost (AVC).

In the long run, there will be no fixed costs as the supply can be changed by changing all the factors of production. Therefore, in a perfectly competitive firm, the supply curve will be the summation of the upward-sloping part of the marginal cost that is above the minimum point of the average cost in a condition when the price is more than or equal to minimum average cost and the vertical portion of price axis in a situation where the price is less than the minimum of average cost. In other words, it is that portion of the marginal cost curve that lies above the minimum point of the average cost curve.

With improvements in technology, the output of the firm is achieved with the same amount of capital and labour increases. This lowers the cost of production and also brings down the marginal cost it takes to produce a given quantity of output. The decrease in the marginal cost leads to a rightward and downward shift in the Marginal Cost (MC) curve. Therefore, the firm’s supply curve will also undergo a similar rightward shift.

Unit tax is imposed per unit of the output which is sold. The impact of the unit tax is that the cost of production is increased, and as a result, there is an increase in marginal cost. Supply falls due to the rising cost, which makes the supply curve tilt towards the left.

The rise in the price of input results in an increased cost of production that has a positive impact on rising marginal cost. The impact on MC Curve is that it will shift upward towards the left, and correspondingly supply curve shifts upward to the left. There is a negative impact on the supply of the firm as and when the input price rises.

An increase in the number of firms has a direct effect on increasing the output of goods. This results in the shifting of the market supply curve to the right.

It is defined as the measure in economics that deals with the responsiveness of quantity supplied to a change in the price of a good.

The solution is as follows:

P= 10

As per the question

The solution is as follows: