Prove that P=AR in PCM
Dear Student,
Perfect competition arises when there are many firms selling a homogeneous good to many buyers. Under perfect competition, a firm is a price taker of its good since none of the firms can individually influence the price of the good to be purchased or sold. As the objective of each perfectly competitive firm, they choose each of their output levels to maximise their profits. The goal for a perfectly competitive firm is maximising its profits is to calculate the optimal level of output which is when Marginal Cost (MC) = Market Price (P).
In Perfect Competition price always remain same because industry is the one always determine the price.
From above we saw that at first the industry needed to determine the price at which it will be able to supply to the customers and customers will also be ready to take goods at that price. Then, in the second table we saw that at same price of Rs. 4 the quantity demanded is increasing which is leading to increase in revenue.
Then we know that AR = (p x quantity sold) / quantity sold . From this we saw that AR is coming equal to the Price..
Also each firm is a price taker and no matter how much they sell, the additional unit is sold at the market price. Thus the MR must equal Price. Profit maximisation requires MR to be equal to MC. Due to free entry and exit, any abnormal or supernormal profit will be competed away leaving firms enjoying a normal profit. Thus AR must equal AC. Since all firms are price takers then AR must equal to price.
Regards,
Perfect competition arises when there are many firms selling a homogeneous good to many buyers. Under perfect competition, a firm is a price taker of its good since none of the firms can individually influence the price of the good to be purchased or sold. As the objective of each perfectly competitive firm, they choose each of their output levels to maximise their profits. The goal for a perfectly competitive firm is maximising its profits is to calculate the optimal level of output which is when Marginal Cost (MC) = Market Price (P).
In Perfect Competition price always remain same because industry is the one always determine the price.
From above we saw that at first the industry needed to determine the price at which it will be able to supply to the customers and customers will also be ready to take goods at that price. Then, in the second table we saw that at same price of Rs. 4 the quantity demanded is increasing which is leading to increase in revenue.
Then we know that AR = (p x quantity sold) / quantity sold . From this we saw that AR is coming equal to the Price..
Also each firm is a price taker and no matter how much they sell, the additional unit is sold at the market price. Thus the MR must equal Price. Profit maximisation requires MR to be equal to MC. Due to free entry and exit, any abnormal or supernormal profit will be competed away leaving firms enjoying a normal profit. Thus AR must equal AC. Since all firms are price takers then AR must equal to price.
Regards,