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NCERT Class 11 Economics Chapter 12 The Theory of the Firm under Perfect Competition
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The Theory of the Firm under Perfect Competition
Chapter: 12
PART – (B) INTRODUCTORY MICROECONOMICS
TEXTUAL QUESTION ANSWERS
1. What are the characteristics of a perfectly competitive market?
Ans: A perfectly competitive market has several key characteristics:
(i) Many Buyers and Sellers: There are a large number of buyers and sellers, so no single entity has the power to influence the market price.
(ii) Homogeneous Products: The goods or services offered by all sellers are identical or highly standardized, meaning there is no differentiation between products.
(iii) Free Entry and Exit: Firms can freely enter or exit the market without significant barriers, such as high startup costs or government regulations.
(iv) Perfect Information: Both buyers and sellers have complete and accurate information about the market, including prices and available goods.
(v) Price Takers: Individual firms and consumers must accept the market price as given. They cannot influence the price due to the large number of competitors.
(vi) No Transaction Costs: There are no costs associated with making transactions, such as shipping fees, search costs, or taxes that could affect the buying or selling process.
(vii) Profit Maximization: Firms in a perfectly competitive market aim to maximize profit by producing at the level where marginal cost equals marginal revenue (MC = MR).
In reality, perfectly competitive markets are rare, but they serve as an idealized model for understanding market dynamics.
2. How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?
Ans: In a perfectly competitive market, total revenue is the product of the market price and the quantity sold by the firm. Since the firm is a price taker, the market price remains constant regardless of the quantity the firm sells.
So, the relationship is:
Total Revenue = Market Price × Quantity Sold.
3. What is the price line?
Ans: ‘Price line’ is a horizontal straight line depicting the relationship between market price and a firm’s output level in a perfectly competitive market.
4. Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why does the curve pass through the origin?
Ans: The total revenue curve of a price-taking firm is upward sloping straight line due to the fact that the price of a price taking firm (competitive firm) remains constant as shown below:
| Units Sold | Market Price | TR (₹) |
| 0 | 10 | 0 |
| 1 | 10 | 10 |
| 2 | 10 | 20 |
| 3 | 10 | 30 |
| 4 | 10 | 40 |
5. What is the relation between market price and average revenue for a price taking firm?
Ans: Average Revenue is defined as the revenue per unit of the output sold. It is expressed as the ratio between total revenue and the output sold.
AR = TR/Q
We know that
TR = P × Q
AR = P × Q/Q
AR = P
Thus, the market price and the average revenue are the same for a perfectly competitive firm.
6. What is the relation between market price and marginal revenue for a price taking firm?
Ans: Market price and average revenue of a price taking firm are equal. Both are indicated by a horizontal straight line. Because market price is constant for a price taking firm.
7. What conditions must hold, if a profit maximising firm produces positive output in a competitive market?
Ans: Two conditions must hold if a profit maximising firm produces positive output in a competitive market:
(a) MC = MR
(b) MC > MR after MC = MR level of output
8. Can there be a positive level of output that a profit maximising firm produces in a competitive market. At which price is not equal to marginal cost? Give an explanation.
Ans: Yes, there can be a positive level of output that a profit maximising firm produces in a competitive market at which price is not equal to marginal cost.
9. Will a profit maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.
Ans: A profit maximising firm in a competitive market will produce a positive level at output in the same where marginal cost is falling. Falling MC means that the cost of producing an additional unit of output trends to reduce. Here price is constant as the firm is working in a competitive market. In this case, the difference between a firm’s total revenue and TVC (TVC = Σ MC) tends to increase. It means a firm’s profit increases with the increase in the level of output.
10. Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC? Give an explanation.
Ans: If a profit-maximising firm produces a positive output in the short run, then the market price must be greater than or equal to the AVC at that output level. Hence when price is less than minimum AVC, the firm produces zero output.
11. Will a profit-maximising firm in a competitive market produce a positive level of output in the long run if the market price is less than the minimum of AC? Give an explanation.
Ans: In the long run, all firms earn zero economic profit, and if any firm earns loss or negative profit, then the firm will shut down its production. Thus, if the firm earns loss, i.e. if price is lesser than LAC at any level of output, it will not be the profit maximising output level of the firm.
12. What is the supply curve of a firm in the short run?
Ans: Short-run aggregate supply curves illustrate supply in the near future or over a period in which capital is fixed. Long-run aggregate supply curves show supply in the long-term in which all inputs are variable. Aggregate supply is a function of total production within an economy and the price level.
13. What is the supply curve of a firm in the long run?
Ans: An enterprise’s long-run supply curve is the increasing part of the LRMC curve from and above the minimum LRAC, together with the zero output for all the cost prices less than the minimum LRAC. This was the concept of the long-run supply curve of a firm.
14. How does technological progress affect the supply curve of a firm?
Ans: A cost saving technological progress will reduce the marginal cost of production. So, the marginal cost curve shifts downward. It means the supply curve shifts forward, signifying an increase in supply.
15. How does the imposition of a unit tax affect the supply curve of a firm?
Ans: With the imposition of unit tax, the cost of production increases. This results in the increase in the marginal cost of every unit of output. As a result, the MC curve and hence the supply curve shifts to the left. Thus, imposition of a unit tax shifts the supply. curve to the left.
16. How does an increase in input price affect the supply curve of a firm?
Ans: Fluctuations in input prices significantly influence the supply curve. When input prices rise, the production cost increases, making it less profitable for producers to supply the same quantity at the existing price. This leads to a decrease in the supply, causing a leftward shift in the supply curve.
17. How does an increase in the number of firms in a market affect the market supply curve?
Ans: Ply curve shifts to the right. This is because more firms supplying more output increases the market supply.
18. What does the price elasticity of supply mean? How do we measure it?
Ans: Price elasticity of supply means the degree of responsiveness of a quantity supplied of a commodity to change in its price.
Percentage change in quantity
19. Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market value of price of each unit of the good is ₹10.
| Quantity Sold | TR | MR | AR |
| 0 | – | – | – |
| 1 | – | – | – |
| 2 | – | – | – |
| 3 | – | – | – |
| 4 | – | – | – |
| 5 | – | – | – |
| 6 | – | – | – |
Ans:
| Price (₹) | Quantity Sold | TR | MR | AR |
| 10 | 0 | 0 | – | – |
| 10 | 1 | 10 | 10 | 10 |
| 10 | 2 | 20 | 10 | 10 |
| 10 | 3 | 30 | 10 | 10 |
| 10 | 4 | 40 | 10 | 10 |
| 10 | 5 | 50 | 10 | 10 |
| 10 | 6 | 60 | 10 | 10 |
20. The following table shows the total revenue and total cost schedule of a competitive firm. Calculate the profit at each level. Determine also the market price of the good.
| Quantity sold | TR (₹) | TC (₹) | Profit (₹) |
| 0 | 0 | 5 | – |
| 1 | 5 | 7 | – |
| 2 | 10 | 10 | – |
| 3 | 15 | 12 | – |
| 4 | 20 | 15 | – |
| 5 | 25 | 23 | – |
| 6 | 30 | 33 | – |
| 7 | 35 | 40 | – |
Ans:
| Quantify sold | TR (₹) | TC (₹) | Profit (₹) |
| 0 | 0 | 5 | -5 |
| 1 | 5 | 7 | -2 |
| 2 | 10 | 10 | 0 |
| 3 | 15 | 12 | 3 |
| 4 | 20 | 15 | 5 |
| 5 | 25 | 23 | 2 |
| 6 | 30 | 33 | -3 |
| 7 | 35 | 40 | -5 |
21. The following table shows the total cost schedule of a competitive firm. It is given that the price of the goods is 10. Calculate the total profit at each level of output. Find the profit maximising level of output.
| Output (Units) | TC (₹) |
| 0 | 5 |
| 1 | 15 |
| 2 | 22 |
| 3 | 27 |
| 4 | 31 |
| 5 | 38 |
| 6 | 49 |
| 7 | 63 |
| 8 | 81 |
| 9 | 101 |
| 10 | 123 |
Ans:
| Output (Units) | TR (₹) | TC (₹) | Profit (₹) |
| 0 | 0 | 5 | -5 |
| 1 | 10 | 15 | -5 |
| 2 | 20 | 22 | -2 |
| 3 | 30 | 27 | 3 |
| 4 | 40 | 31 | 9 |
| 5 | 50 | 38 | 12 |
| 6 | 60 | 49 | 11 |
| 7 | 70 | 63 | 7 |
| 8 | 80 | 81 | -1 |
| 9 | 90 | 101 | -11 |
| 10 | 100 | 123 | -23 |
Profit maximisation level of output is 5 units.
22. Consider a market with two firms. The following table shows the supply schedules of the two firms. SS₁ column gives the supply schedule of firm 1 and SS₂ column gives the supply schedule of firm 2. Compute the market supply schedule.
| Price (₹) | SS₁(Units) | SS₂ (Units) |
| 0 | 0 | 0 |
| 1 | 0 | 0 |
| 2 | 0 | 0 |
| 3 | 1 | 1 |
| 4 | 2 | 2 |
| 5 | 3 | 3 |
| 6 | 4 | 4 |
Ans: Market Supply Schedule:
| Price (₹) | SS₁(Units) | SS₂ (Units) | MS (kg.) |
| 0 | 0 | 0 | 0 |
| 1 | 0 | 0 | 0 |
| 2 | 0 | 0 | 0 |
| 3 | 1 | 1 | 2 |
| 4 | 2 | 2 | 4 |
| 5 | 3 | 3 | 6 |
| 6 | 4 | 4 | 8 |
23. Consider a market with two firms. In the following table columns labelled as SS₁ and SS₂ gives the supply schedules firm 1 and firm 2 respectively. Compute the market supply schedule.
| Price (₹) | SS₁ (kg.) | SS₂ (kg.) |
| 0 | 0 | 0 |
| 1 | 0 | 0 |
| 2 | 0 | 0 |
| 3 | 1 | 0 |
| 4 | 2 | 0.5 |
| 5 | 3 | 1 |
| 6 | 4 | 1.5 |
| 7 | 5 | 2 |
| 8 | 6 | 2.5 |
Ans: Market Supply Schedule:
| Price (₹) | SS₁ (kg.) | SS₂ (kg.) | MS (kg.) |
| 0 | 0 | 0 | 0 |
| 1 | 0 | 0 | 0 |
| 2 | 0 | 0 | 0 |
| 3 | 1 | 0 | 1 |
| 4 | 2 | 0.5 | 2.5 |
| 5 | 3 | 1 | 4 |
| 6 | 4 | 1.5 | 5.5 |
| 7 | 5 | 2 | 7 |
| 8 | 6 | 2.5 | 8.5 |
24. There are three identical firms in a market. The following table shows the supply schedule of firm 1. Compute the market supply schedule.
| Price (₹) | SS₁ (kg.) |
| 0 | 0 |
| 1 | 0 |
| 2 | 2 |
| 3 | 4 |
| 4 | 6 |
| 5 | 8 |
| 6 | 10 |
| 7 | 12 |
| 8 | 14 |
Ans: Market Supply Schedule
| Price (₹) | SS₁ (kg.) | SS₂ (kg.) | SS₃ (kg.) | MS (kg.) |
| 0 | 0 | 0 | 0 | 0 |
| 1 | 0 | 0 | 0 | 0 |
| 2 | 2 | 2 | 2 | 6 |
| 3 | 4 | 4 | 4 | 12 |
| 4 | 6 | 6 | 6 | 18 |
| 5 | 8 | 8 | 8 | 24 |
| 6 | 10 | 10 | 10 | 30 |
| 7 | 12 | 12 | 13 | 36 |
| 8 | 14 | 14 | 14 | 42 |
25. A firm earns a revenue of ₹50 when the market price of the good is ₹10. The price increases ₹15 and the firm now earns a revenue of ₹150. What is the price elasticity of a firm’s supply curve?
Ans:
| Price (₹) | Total Revenue (₹) | Supply (Units) |
| 10 | 50 | 50 ÷ 10 = 5 |
| 15 | 150 | 150 ÷ 15 = 10 |
26. The market price of a good changes from ₹5 to ₹20. As a result the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
| Price (₹) | Supply (units) |
| 5 | X (suppose) |
| 20 | X + 15 |
Ans:
X = 10
X = 10 + 15 = 25
Hence, initial and final output levels of the firm are 10 and 25 units respectively.
27. At the market price of ₹10, a firm supplies 4 units of output. The market price increases to ₹30. The price elasticity of the firm’s supply is 1.25. What quantity will the firm supply at the new price?
| Price (₹) | Supply (Units) |
| 10 | 4 |
| 30 | ? |
Ans:
New supply = 4 + 10 = 14 (units)
Hence, new supply at the new price will be 14 units.
