Economics-For Managers

In perfect competition, there is large number of buyers and sellers, products are homogeneous, there are no barriers to enter and exit, buyers and sellers have perfect knowledge about the market conditions and there is perfect mobility of resources and the absence of transportation cost. Supply and demand forces determine the price of a commodity. Short run equilibrium of a firm is based on the total revenue and total cost, and marginal revenue and marginal cost. Firms in an industry try to maximize their profits by adjusting the output to a level where MC=MR. Long run equilibrium plays a crucial role in deciding the existence of the firm. Profits earned by the firms would attract others to enter the industry and with the entry of new firms there will be a shift in the short-run industry supply curve to the right until it intersects with the market demand curve at the price at which all firms make zero economic profits. It is then that the industry will be in equilibrium. To fulfil the marginal conditions of allocative efficiency, three properties are observed in a freely competitive market mechanism: efficient allocation of resources among firms; efficient distribution of goods produced between consumers; and efficient combination of products.