Market

Market is a place where buyers and seller gather in order to buy and sell a particular goods or commodity. It is not restricted to a building, place or area. Kinds of Market
Perfect Competition Monopoly Monopolistic Competition Oligopoly

Perfect Competition
Perfect competition is a market structure characterized by a complete absence of rivalry among the individual firms. The features of perfect competition are a) large number of buyers and sellers b) product homogeneity c) free exit and exit of firms d) profit maximization e) no government regulation f) perfect mobility of factors of production g) perfect knowledge

Demand curve of perfect competition

The demand curve in perfect competition is infinitely elasticity which indicates that the firm can sell any amount of output at the prevailing market price.
P AR =MR

o output

Short run Equilibrium

TR & TC Method
In this method a firm is in equilibrium when it maximizes its profit, defined as the difference between total cost and total revenue.
TC TR Max of profit loss Loss

Xa

Xe

Xb

Marginal revenue & marginal cost method

In the short run firm can earn normal profit, super normal profit and also losses.
MC MC AC p e
AR=MR

MC AC p p1 e
AR=MR

AC

e1
p1 p e

e1

Industry equilibrium in the short run

Given the market demand and the market supply the industry is in equilibrium at that price at which the quantity demanded is equal to the quantity supplied. s
d Mc Ac p1 e1 e Mc Ac e

p p1

e
e1

p
d q

s q1 q2

Long run firm equilibrium

In the long run firms are in equilibrium when they have adjusted their plant so as to produce at their long run AC curve, which is tangent to the demand curve defined by the market price. In the long run the firms will be earning just normal profit.
s d p p1 s S d S p
SMC SAC1

LMC

LAC

SMC SAC

Long run equilibrium of industry

The industry is in equilibrium in the long run when price is reached at which all firms are in equilibrium. The industry produces at the minimum point of LAC curve and makes only normal profit.
d s p
SAC
SMC

LMC

LAC

s
o Q

d
o X

Effect of Taxes on Price and Quantity

Imposition of a Lump Sum Tax Imposition of a Profit Tax Imposition of a Specific Sales Tax

Imposition of a Lump Sum Tax

Increase in fixed cost Upward shift of AFC and AC curves AVC and MC do not affected In short run no effect on equilibrium In long run supply will decrease and price will increase

Imposition of a Profit Tax

Effects are same as those of a lump sum tax No effect on MC and short run equilibrium of the firm and industry In long run supply will decrease and price will increase

Imposition of a Specific Sales Tax

It affects MC curve of a firm Burden of tax on consumer depends on price elasticity of supply with given demand The more elastic supply, the higher burden of a specific tax on consumer and less the burden on the firm