Forms of Market and Price Determination Test - 3

When AR> AC , the firm will earn abnormal profits, and since the cost is less, the producer will produce more to get more revenue. When AR becomes equal to AC then the firm starts earning normal profits and the producer will not like to go beyond this level as after this AC will become greater than AR and producer starts incurring losses.

The demand curve(AR Curve) in a monopolistic competition slopes downward as more output can be sold only by reducing the prices. Due to this reason, the MR curve also slopes downward, but it falls much faster than AR or the Demand curve. So, MR curve is below the demand curve.

when price falls, AR will be greater than MR , because MR falls more quickly as compared to AR. MR curve is steeper than the flatter AR Curve.

As under this competition, firm is a price taker and thus price fixed by the industry has to be accepted by all the firms. Thus uniform prices prevails in the market. It means revenue from every additional unit ,i.e. MR is equal to Price (AR) of the product. So, price=AR=MR.

In perfect competition when MR=MC  the firm will earn normal profits and at this point profits are maximised and producer will be at equilibrium. After this point MC starts rising. and MR is constant at the same level. So, when MC>MR , the producer will start incurring losses. So MR= MC level gives him maximum profits.

As under this form, no seller has the tendency to influence the price of the good and there is uniform price in the market.. All the goods are homogeneous and there is free entry and exit. All these features ensures normal profit to the producers..

In a perfect competition there are large no. of buyers and sellers selling homogeneous products. The firm is a price taker and not price maker in perfect competition. So, the firm has to sell at the price determined by the market. They can sell as much as they want at the prevailing price.

The MR curve slopes downward but at twice the rate of AR. When TR is maximum MR is zero. Any increase in output beyond the point where MR=0 leads to a negative MR.

the condition is LAC=LMC=P and also that the LMC curve cuts MR curve from below. In the long run firm under perfect competition earns normal profits due to freedom of entry and exit.

When AR is more than AC, then a firm can earn supernormal profits. This implies that the cost of production is less than the revenues earned. So, super normal profits are earned. Normal profits are earned when AC=AR