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Assignment - 1 Subject : Business Economics

2. Explain how equilibrium of the firm is achieved. Also, explain (along with examples)

how profit maximizing output is determined in short run and long run for:

a. Perfect Competitive market

b. Monopoly market

c. Monopolistic market

d. Oligopoly market

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The long-run equilibrium of a perfectly competitive industry generates six specific equilibrium conditions, including: (1) economic efficiency (P = MC), (2) profit maximization (MR = MC), (3) perfect competition (MR = AR = P), (4) breakeven output (P = AR = ATC), (5) minimum production cost (MC = ATC), and (6) minimum efficient scale (MC = ATC = LRAC = LRMC).

In the long-run equilibrium of a perfectly competitive industry, the market price, the number of firms in the industry, and each firm's scale of production adjust such that each firm produces at the lowest point on its long-run average cost curve--which is its minimum efficient scale. At this production scale the following multivariable equilibrium condition is achieved:

P = AR = MR = MC = LRMC = ATC = LRAC

This overall equilibrium condition can be divided into the six specific conditions: (1) economic efficiency (P = MC), (2) profit maximization (MR = MC), (3) perfect competition (MR = AR = P), (4) breakeven output (P = AR = ATC), (5) minimum production cost (MC = ATC), and (6) minimum efficient scale (MC = ATC = LRAC = LRMC).

For a closer look at these six conditions, consider the hypothetical perfectly competitive Shady Valley zucchini growing industry. While zucchini growing in the real world does not match all of the conditions of perfect competition, it comes close enough to serve as a illustration for this analysis. The hypothetical Shady Valley zucchini growing industry contains a large number of relatively small firms (gadzillions of zucchini growers, each producing a handful of zucchinis each day), identical products (one zucchini is the same as every other zucchini), freedom of entry and exit (anyone can grow zucchinis with no up front cost or legal restriction), and perfect knowledge of prices and technology (ever grower knows how to grow zucchinis and they know all relevant prices). Not absolutely perfect, but close.

Economic Efficiency

P = MC

The condition that price equals marginal cost (P = MC) is the standard condition for economic efficiency. This condition means that resources are being used to produce goods that generate the greatest possible level of satisfaction.

If the price that a hypothetical zucchini grower named Phil (as well as ever other perfectly competitive zucchini grower) receives for his zucchinis is equal to the marginal cost of producing zucchinis, then it is not possible to produce more zucchinis or fewer zucchinis and improve society's overall satisfaction.

Suppose, for example, that in long-run equilibrium the zucchini price and the marginal cost of zucchini production are $4 per pound.

• From the buyers viewpoint, this $4 price means that they receive $4 worth of satisfaction from consuming a pound of zucchinis. If buyers do not enjoy $4 worth of satisfaction, then they are not willing to pay $4. As such, the good produced by the perfectly competitive zucchini growers (that would be zucchinis) generates $4 of satisfaction.

• From the sellers viewpoint, marginal cost is the opportunity cost of producing zucchinis. This is the value of other goods NOT produced when resources are used to produce zucchinis. If the marginal cost of producing a pound of zucchinis is $4, then the resources that Phil uses to produce zucchinis could have been used to produce another good, such as kumquats or cucumbers. And the value of the other good NOT produced is $4. In other words, kumquat buyers are willing to pay $4 for the kumquats that could have been produced with the resources that are used to produce the zucchini.

Establishing price and output in the short run under perfect competition

The previous diagram shows the short run equilibrium for perfect competition. In the short run, the twin forces of market demand and market supply determine the equilibrium "market-clearing" price for the industry. In the diagram below, a market price P1 is established and output Q1 is produced. This price is taken by each of the firms. The average revenue curve (AR) is their individual