Concept of Firm and Industry
Firm
A firm is a single unit of an industry that produces goods and services
with the objective of maximizing profit or minimizing loss.
Industry
An industry is a group of firms producing homogeneous (similar) products.
Equilibrium of the Firm
The equilibrium of a firm refers to a situation in which the firm is either
maximizing profit or minimizing loss.
TR–TC Approach
According to the TR–TC approach, a firm attains equilibrium at that level
of output where the difference between Total Revenue (TR) and Total Cost (TC)
is maximum.
MR–MC Approach
According to the MR–MC approach, a firm is in equilibrium when Marginal
Revenue (MR) is equal to Marginal Cost (MC), and MC cuts MR from below.
Perfect Competition Market
Perfect competition is a market structure where there are a large number
of buyers and sellers producing homogeneous products at a uniform price,
with complete absence of rivalry among individual firms.
Main Features of Perfect Competition
- Large number of buyers and sellers
- Homogeneous products
- Uniform price
- Free entry and exit of firms
- Perfect knowledge
- Firms are price takers
Long-run Equilibrium of a Firm under Perfect Competition
A firm is in long-run equilibrium when it earns only normal profit.
Conditions for Long-run Equilibrium
- Market demand is equal to market supply
- LMC = MR
- LMC cuts MR from below
- LAC = AR
Monopoly
Monopoly is a market structure where there is a single seller of a product
with no close substitutes and a large number of buyers. There are strong
barriers to entry, and the monopolist is a price maker.
Characteristics of Monopoly
- Single seller and large number of buyers
- No close substitutes
- Barriers to entry of new firms
- Independent price policy
- Price maker, not price taker
- Price discrimination is possible
- Objective of profit maximization
Types of Monopoly
- Pure monopoly
- Imperfect monopoly
- Natural monopoly
- Legal monopoly
- Bilateral monopoly
Determination of Price and Output under Monopoly
The monopolist determines price and output on the basis of the MR–MC approach.
Short-run Equilibrium of a Monopolist
Conditions
- MR = MC
- MC must cut MR from below
Long-run Equilibrium of a Monopolist
Conditions
- MR = LMC
- LMC cuts MR from below
Similarities between Perfect Competition and Monopoly
- Objective of firms is profit maximization
- Equilibrium condition is MR = MC
- Cost curves (AC and MC) are U-shaped
- Firms may earn abnormal profit in the short run
- Large number of buyers
Differences between Perfect Competition and Monopoly
| Basis |
Perfect Competition |
Monopoly |
| Nature of product |
Homogeneous |
No close substitutes |
| Number of firms |
Large number of firms |
Single firm |
| Entry and exit |
Free entry and exit |
Restricted entry |
| State of profit |
Normal profit in long run |
Abnormal profit possible |
| Demand curve |
Perfectly elastic |
Downward sloping |
| Price |
Uniform price |
Price discrimination possible |
Quick Exam Points
- Firm equilibrium → TR–TC or MR–MC approach
- Perfect competition → Price taker
- Monopoly → Price maker
- MR = MC is the core equilibrium condition