Question

In a perfectly competitive market, there are two conditions that must be met in order for there to be an equilibrium. Identify both.

This is not a long essay - be concise and specific.

Answer 1

In a perfectly competitive market, there are two conditions that must be met in order for there to be an equilibrium.

Two Condition are as follows -

1. MC = MR = P = AR
2. MC curve cuts the MR curve from below

In other words,In perfect competition , equilibrium will be at where P = MC , the MC curve must intersect the Price  curve from below and after the intersection lie above the Price  curve. In simpler terms, the firm must keep adding to its output as long as P >MC.

This is because additional output adds more revenue than costs and increases its profits. Further, if MC=Price , but the firm finds that by adding to its output, MC becomes smaller than price , then it must keep increasing its output.Since it is a perfectly competitive market, the demand for the product of the firm is perfectly elastic. Further, it can sell all its output at the market price. Therefore, its demand curve runs parallel to the X-axis throughout its length and its MR curve coincides with the AR curve and Price .