Livestock Economics, Marketing and Business Management

SHORT-RUN EQUILIBRIUM PRICE WITH ABNORMAL LOSS

Short- Run Equilibrium price and output under perfect competition

• Show the determination of short run equilibrium price and output under perfect competition.
• In this figure, we show the average cost curve (AC) and marginal cost curve (MC) of the firm, together with its demand curve. We said that the demand curve is also the average revenue curve is also the average revenue curve and the marginal revenue curve of the firm, in a perfectly competitive market.
• The firm is in equilibrium at point E where MR = MC, i.e., MC curve intersects the MR curve at the point E. The equilibrium price is OP and equilibrium output is OQ.
• Profit per unit of output is the difference between average revenue or price and average cost. Average revenue or price is QE or OP. Average cost is QS.
• Therefore, profit per unit of output is ES. Total profit earned the firm will be equal to LPxES. Thus, the total profit earned the firm is PESL.

Abnormal Loss (Click here to view graph)

• Figure shows the abnormal loss of a firm, where prevailing market price of the product is such that the price line average and marginal revenue curves lies below the average throughout.
• In the figure, the equilibrium price and output are determined when MC interest MR at point E. OQ is the equilibrium output and OP is the equilibrium price.
• QE is the average revenue and NQ is the average cost. Since average revenue or price (QE) is less than average cost (NQ), the loss per unit of output is equal to NE and total loss will be equal to PENM. This is known as abnormal loss.
• Hence, the conditions of firm’s equilibrium under perfect competition are:
  • MC=MR = Price
  • MC curve must cut MR curve from below