Equilibrium under Perfect Competition of Market

There is a demand curve under perfect competition:

Equilibrium under perfect competition

This is a horizontal demand of curve. So, the price is given and the firm has to decide the output to be produced according to their cost condition at that price.

Equilibrium Condition or the optimal output level:

The firm which wants to maximize its profit and minimize the loss should produce a output where MR=MC. This condition is applied to all the firms regardless of whether it has the control to set the price or not. But where the firm has no power to decide, the price MR is the going market price (P=MR).

Revenue and cost concept tells that TR-TC is total profit. Similarly, MR-MC is the marginal profit. When both reach at this point that is MR=MC. This formula shows that the firm can make no more profit and therefore should stop there. This is called output level.

We can show the equilibrium condition under perfect competition as:

Equilibrium Condition under Perfect Competition

After this condition there are short run equilibrium with loss and long run equilibrium. The short run equilibrium with loss brings a condition of shut down point. In short run, the firm may continue its production to recover losses in long run.

We assume that all the firms have identical cost condition in the industry. In the short run, the firm will keep on producing even when it is incurring loss. But in the long run, the firm, which is not even getting normal profit, will shut down.

The existing firms will return to normal profits from super profits. So, in long run, under perfect competition the firm incurs normal profit. There are no super normal profit and no huge loss.

This concept brings an understanding about market and competition of market. This curve is applied in all competition of market.