Forms of Market and Price Determination Test - 5

When a new firm enters the market, the supply increases and supply curve shifts to the right. This creates an excess supply at the existing price. This leads to competition among the sellers, which reduces the price .

Since the firm is a price taker, the price is constant, so uniform prices prevail, because of which MR will also be constant at all levels of output. So MR is a straight horizontal line in Perfect competition.

Yes, in the long the firm earns only normal profits. i.e. MR=MC . when MR>MC the firm will produce more because they can get more revenue, and when MC>MR the firm stops production as they incur losses. So they would like to be at the level where MR=MC where they earn normal profits.

It cannot be horizontal straight line because TR cannot be the same . TR will increase when more units of commodity are sold. 

Because AR is nothing but the price of the good. So AR curve is the same as demand curve.

We know that AR=TR/output. From this we can derive TR=AR/output

In a perfectly competitive market if prices fall below the average cost of the good, then AR will become less than AC . AR

The supply curve is relavant only for perfect competition because the price of the product is determined by the market, i.e. the forces of demand and supply. Equilibrium level is acheived when Market demand = Market supply.

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.

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.

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.

Profits will increase as long as MR > MC as it is possible to add to profits by producing more.  When MC > MR , the benefits becomes less than the cost, so, the producer will incur losses. It is only at MR = MC that the profits are maximised and the producer is in equilibrium

In reality perfect competition has never existed. We can say that perfect competition may exist for agricultural goods like rice, wheat etc. But for other commodities, there is always some difference between the products like brand name of the product makes it different even though the product may be the same. 

The AR is essentially the price of the commodity.

Average revenue = TR/Qty which is the per unit revenue

When price is constant then AR will also be equal to price as AR = TR/Qty.  Marginal revenue is addition in revenue with sale of every additional unit. If price is constant, then each additional unit will yield revenue equal to the price. So, in perfect competition AR=MR.

There are large number of buyers and sellers in a perfect competition and they produce homogeneous goods.. As there is free entry and free exit in such markets, any seller can enter the industry . there are no restricitions on entry and exit. 

The  automobe industry is oligopolistic as there are only few producers of automobiles and each firm produces a significant  portion of the output. 

AR = price as AR is the revenue generated per unit of output sold. 

If all units are sold at the same price , AR will be equal to MR.  This happens in perfect competition. AR is nothing but price. and price is constant, the revenue from every additional unit will be equal to the price (AR ). so we have AR=MR under perfect competition.

when MC=MR, the firm is at equlibrium. This is the point where their profits are maximised and they earn normal profits at this point. If they go beyond this point, they will incur losses. 

We rarely find a situation of perfect competition in the real market. But we can say that perfect competition exists for agricutural goods like rice , wheat etc. as they are all homogeneous and there are large numbers of buyers and sellers of agricultural products. 

The average revenue is essentially the price of the commodity. So the AR curve is the same as demand curve.