Class | Subject | Book | Chapter | Session | Questions covered |
|---|---|---|---|---|---|
XII | Economics | Microeconomics (NCERT) | 4 – The Theory of the Firm under Perfect Competition | 2026-27 | 27 of 27 |
Chapter at a glance
Concept | Key point |
|---|---|
Perfect competition | Many buyers and sellers, homogeneous product, free entry and exit, perfect information; firms are price-takers |
Revenue | ; ; for a price-taking firm; price line is horizontal    |
Profit maximisation (short run) | , SMC non-decreasing,   |
Profit maximisation (long run) | , LRMC non-decreasing,   |
Shut-down point | Short run: minimum AVC; long run: minimum LRAC |
Firm’s supply curve | Short run: rising SMC from minimum AVC; long run: rising LRMC from minimum LRAC |
Shifts in supply | Technological progress → right; rise in input price or unit tax → left |
Market supply | Horizontal sum of firms’ supply curves |
Price elasticity of supply |  |
Exercises
What are the characteristics of a perfectly competitive market?
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- Large number of buyers and sellers – no single buyer or seller can influence the price.
- Homogeneous product – all firms sell identical products.
- Free entry and exit of firms.
- Perfect information – all buyers and sellers have complete knowledge of the market.
- Firms are price-takers – each firm accepts the market price determined by industry demand and supply.
- (Also) perfect mobility of factors and no transport costs.
Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms acting as price-takers.
How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?
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Total revenue equals the market price multiplied by the quantity sold. Since a competitive firm takes the price as given, TR rises proportionately with the quantity sold.
TR = market price × quantity sold.
What is the ‘price line’?
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The price line is the horizontal straight line drawn at the level of the market price, showing the price the firm receives for any quantity it sells. Since for a price-taking firm, the price line is also the firm’s demand (AR) curve and MR curve; it is perfectly elastic.
The price line is a horizontal line at the market price; for a competitive firm it is also its AR (demand) and MR curve.
Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why does the curve pass through the origin?
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- with constant. Each additional unit adds the same amount to TR, so TR rises at a constant rate – it is an upward-sloping straight line with slope equal to .
- At zero output, , so the curve passes through the origin.
Because TR = p × q with p constant, TR rises by the same amount p for each unit (a straight line with slope p), and TR is zero at zero output (it passes through the origin).
What is the relation between market price and average revenue of a price-taking firm?
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Average revenue equals the market price.
AR = market price.
What is the relation between market price and marginal revenue of a price-taking firm?
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Since the price is constant, each additional unit sold adds exactly to total revenue:
So MR equals the market price (MR = AR = p).
MR = market price (= AR).
What conditions must hold if a profit-maximising firm produces positive output in a competitive market?
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In the short run, at the profit-maximising output :
- Price equals marginal cost: .
- SMC is non-decreasing at (rising, not falling).
- Price is at least the average variable cost: .
In the long run:
- ;
- LRMC is non-decreasing;
- .
Short run: p = SMC, SMC non-decreasing and p ≥ AVC; long run: p = LRMC, LRMC non-decreasing and p ≥ LRAC.
Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.
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No.
- If p > MC, producing one more unit adds more to revenue () than to cost (MC), so profit can be increased by increasing output.
- If p < MC, the last unit adds more to cost than to revenue, so profit can be increased by reducing output.
Only when p = MC can profit not be increased by changing output. So a profit-maximising positive output must satisfy p = MC.
No – if p > MC the firm can raise profit by producing more, and if p < MC by producing less, so profit is maximum only where p = MC.
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.
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No. Suppose p = MC at an output where MC is falling. If the firm produces a little more, MC falls below p, so each extra unit adds more to revenue than to cost, increasing profit. So that point cannot be the profit-maximising output; the firm will expand until MC is rising and equals p. Hence profit is maximised only where MC is non-decreasing.
No – where MC is falling, producing a little more makes MC less than p and raises profit, so the profit-maximising output must lie where MC is rising.
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.
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No. If , then at any positive output the firm’s TR is less than its TVC. Its loss would be TFC + (TVC – TR), which is greater than TFC. By shutting down (producing zero), the firm loses only TFC. So it minimises losses by producing zero output. Minimum AVC is the shut-down point.
No – if price is below minimum AVC, the firm cannot even cover variable cost; producing would lose more than the fixed cost, so it shuts down (zero output).
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.
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No. In the long run all costs are variable; there is no fixed cost to bear. If , the firm makes a loss at every positive output. By exiting (producing zero), it earns zero profit, which is better than a loss. So in the long run the firm produces positive output only if .
No – in the long run there is no fixed cost; if price is below minimum LRAC the firm makes losses at every output, so it exits (zero output).
What is the supply curve of a firm in the short run?
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The short-run supply curve of a firm is the rising part of the SMC curve from and above the minimum point of AVC, together with zero output for all prices below minimum AVC. At each price ≥ min AVC, the firm supplies the output where p = SMC.
It is the rising portion of the SMC curve above minimum AVC, with zero output at prices below minimum AVC.
What is the supply curve of a firm in the long run?
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The long-run supply curve of a firm is the rising part of the LRMC curve from and above the minimum point of LRAC, together with zero output for all prices below minimum LRAC.
It is the rising portion of the LRMC curve above minimum LRAC, with zero output at prices below minimum LRAC.
How does technological progress affect the supply curve of a firm?
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Technological progress allows the firm to produce the same output with fewer inputs (or more output with the same inputs). This lowers the marginal cost of production at every output level. As the supply curve is the rising part of the MC curve, the supply curve shifts to the right (downward) – the firm supplies more at each price.
It lowers marginal cost at every output, shifting the firm’s supply curve to the right.
How does the imposition of a unit tax affect the supply curve of a firm?
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A unit tax (a fixed tax per unit of output) raises the marginal cost (and AVC) by the amount of the tax at every output level. The SMC curve shifts upward by the tax, so the firm’s supply curve shifts to the left – it supplies less at each price (and the shut-down price rises).
A unit tax raises marginal cost by the tax amount at every output, shifting the supply curve upward/to the left.
How does an increase in the price of an input affect the supply curve of a firm?
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An increase in the price of an input (e.g. wages, raw materials) raises the cost of production and the marginal cost at every level of output. Hence the MC curve shifts upward and the firm’s supply curve shifts to the left – less is supplied at each price.
It raises marginal cost at every output, shifting the supply curve to the left.
How does an increase in the number of firms in a market affect the market supply curve?
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Market supply is the horizontal sum of the supply curves of all firms. An increase in the number of firms means more output is supplied at each price, so the market supply curve shifts to the right.
It shifts the market supply curve to the right, since more firms supply output at each price.
What does the price elasticity of supply mean? How do we measure it?
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Price elasticity of supply measures the responsiveness of quantity supplied to a change in the price of the good:
It is positive (supply curve slopes upward). If , supply is elastic; , inelastic; , unitary elastic.
Geometric method: for a straight-line supply curve, extend it to meet the quantity axis. If it meets the axis at the origin, ; on the negative side (left of origin), ; on the positive side, .
Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price: e_S = (Δq/Δp)(p/q).
Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is ₹ 10. (Quantity sold: 0–6)
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Quantity sold | TR (₹) | MR (₹) | AR (₹) |
|---|---|---|---|
0 | 0 | – | – |
1 | 10 | 10 | 10 |
2 | 20 | 10 | 10 |
3 | 30 | 10 | 10 |
4 | 40 | 10 | 10 |
5 | 50 | 10 | 10 |
6 | 60 | 10 | 10 |
TR = 10q (0, 10, …, 60); MR = AR = ₹ 10 at every output.
The following table shows the total revenue and total cost schedules of a competitive firm (Q: 0–7; TR: 0, 5, 10, 15, 20, 25, 30, 35; TC: 5, 7, 10, 12, 15, 23, 33, 40). Calculate the profit at each output level. Determine also the market price of the good.
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Q | TR | TC | Profit = TR – TC |
|---|---|---|---|
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 |
Market price = TR/Q = ₹ 5. Profit is maximum (₹ 5) at 4 units.
Profit: –5, –2, 0, 3, 5, 2, –3, –5; market price = ₹ 5 (maximum profit ₹ 5 at 4 units).
The following table shows the total cost schedule of a competitive firm (Output: 0–10; TC: 5, 15, 22, 27, 31, 38, 49, 63, 81, 101, 123). It is given that the price of the good is ₹ 10. Calculate the profit at each output level. Find the profit maximising level of output.
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Q | TR = 10Q | TC | Profit | MC |
|---|---|---|---|---|
0 | 0 | 5 | –5 | – |
1 | 10 | 15 | –5 | 10 |
2 | 20 | 22 | –2 | 7 |
3 | 30 | 27 | 3 | 5 |
4 | 40 | 31 | 9 | 4 |
5 | 50 | 38 | 12 | 7 |
6 | 60 | 49 | 11 | 11 |
7 | 70 | 63 | 7 | 14 |
8 | 80 | 81 | –1 | 18 |
9 | 90 | 101 | –11 | 20 |
10 | 100 | 123 | –23 | 22 |
Profit is maximum (₹ 12) at 5 units. (Beyond 5 units MC exceeds the price of ₹ 10.)
Profit-maximising output = 5 units, with maximum profit ₹ 12.
Consider a market with two firms. The following table shows the supply schedules of the two firms (Price ₹ 0–6; SS1: 0, 0, 0, 1, 2, 3, 4; SS2: 0, 0, 0, 1, 2, 3, 4). Compute the market supply schedule.
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Price (₹) | SS1 | SS2 | Market supply |
|---|---|---|---|
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 |
Market supply: 0, 0, 0, 2, 4, 6, 8 units at prices ₹ 0–6.
Consider a market with two firms. In the following table, columns labelled as SS1 and SS2 give the supply schedules of firm 1 and firm 2 respectively (Price ₹ 0–8; SS1 (kg): 0, 0, 0, 1, 2, 3, 4, 5, 6; SS2 (kg): 0, 0, 0, 0, 0.5, 1, 1.5, 2, 2.5). Compute the market supply schedule.
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Price (₹) | SS1 (kg) | SS2 (kg) | Market supply (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 |
Market supply: 0, 0, 0, 1, 2.5, 4, 5.5, 7, 8.5 kg at prices ₹ 0–8.
There are three identical firms in a market. The following table shows the supply schedule of firm 1 (Price ₹ 0–8; SS1: 0, 0, 2, 4, 6, 8, 10, 12, 14). Compute the market supply schedule.
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Market supply = 3 × SS1.
Price (₹) | SS1 | Market supply |
|---|---|---|
0 | 0 | 0 |
1 | 0 | 0 |
2 | 2 | 6 |
3 | 4 | 12 |
4 | 6 | 18 |
5 | 8 | 24 |
6 | 10 | 30 |
7 | 12 | 36 |
8 | 14 | 42 |
Market supply: 0, 0, 6, 12, 18, 24, 30, 36, 42 units at prices ₹ 0–8.
A firm earns a revenue of ₹ 50 when the market price of a good is ₹ 10. The market price increases to ₹ 15 and the firm now earns a revenue of ₹ 150. What is the price elasticity of the firm’s supply curve?
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Initial quantity = 50/10 = 5; new quantity = 150/15 = 10.
e_S = 2 (elastic supply).
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.
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. So .
; final output = 10 + 15 = 25.
Initial output = 10 units; final output = 25 units.
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?
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. .
; new quantity = 4 + 10 = 14 units.
The firm will supply 14 units.
Topic checklist
- ☒ Features of perfect competition; TR, AR, MR (Q 1–6, 19)
- ☒ Profit maximisation conditions (Q 7–11, 20, 21)
- ☒ Firm’s supply curve and its shifts (Q 12–16)
- ☒ Market supply (Q 17, 22–24)
- ☒ Price elasticity of supply (Q 18, 25–27)