Class 12th Economics - The Theory of the Firm Under Perfect Competition Case Study Questions and Answers 2022 - 2023
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The Theory of the Firm Under Perfect Competition Case Study Questions With Answer Key
12th Standard CBSE
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Reg.No. :
Economics
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A perfectly competitive market has the following defining features:
1. The market consists of a large number of buyers and sellers, i.e., each individual buyer and seller is very small compared to the size of the market.
2. Each firm produces and sells homogenous product, i.e., buyers can buy from any seller.
3. Entry into the market as well as exit from the market are free for firms. This condition is essential for the large number of firms to exist.
4. Information is perfect w.r.t. price, quality and other relevant details about the product.
These features result in the single most distinguishing characteristics of perfect competition: the price taking behaviour of the firm.
(a) Explain the 'large number of buyers and sellers' feature of a perfectly competitive market.
(b) Which condition is essential for the large number of firms to exist? -
Technological progress affects the supply of a product by altering its cost of production. If there is improvement in production technology used by the firm, the cost of production declines and consequently the firm would supply more than before at the given price. On the other hand, if the firm uses primitive technology, the cost of production rises and consequently the firm would supply less than before.
Analyse graphically the impact of the improvement in production technology used by the given firm on its supply.
Case Study
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Answers
The Theory of the Firm Under Perfect Competition Case Study Questions With Answer Key Answer Keys
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(a) The feature 'large number of buyers and sellers' in a perfectly competitive market implies that each individual buyer and seller is very small entity compared to the size of the market. In other words, no individual buyer or seller can influence the market by their size.
(b) The condition 'entry into the market as well as exit from the market are free for firms' is essential. for the large number of firms to exist. -
If there is an improvement in production technology used by the given firm, the cost of production will decline and consequently the firm would supply more than before at the given price. This can be proven with the help of the diagram given below.
In the given diagram, we show the price of the given good X (Px) on the OY axis and the supply of the good X (Sx) on the OX axis. SS' denotes the original supply curve. At the given price OP initially OQ amount of the given good was supplied. But now because of the improvement in production technology, the CoP declines and consequently the firm will now supply more than before at the given price, i.e., supply of the given good will increase, implying that the supply curve will shift to the right from SS' to S1S1. Now at the given price OP, due to the improvement in production technology, OQ1 amount of the given good will be supplied which is greater than the initial amount OQ by the distance QQ1 (OQ1 - OQ).
