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Perfect Competition : Short-Run: Can a loss making competitive firm continue in business? - YouTube
Channel: Vellaichamy Nallasivam
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Perfect Competition
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- Short-run equilibrium of a firm
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–Can a loss making competitive firm
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continue in business?
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A competitive firm may suffer loss in the short run.
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In such a case the firm will try to minimise the loss.
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The loss is PHFE.
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The firm minimises it loss
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by satisfying the equilibrium conditions.
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It equates MC with MR.
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At the point of equilibrium MC is increasing.
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The equilibrium output is M.
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If the firm produces either less than
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or greater than M,
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the loss will be higher then PHFE.
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Under such a circumstance,
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the firm may close down its business
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or continue its production.
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When will it close down?
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When will it continue?
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Well, here we shall see them clearly.
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When will the firm close down its operation?
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For this we have to refer its AVC curve.
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AVC is its AVC curve.
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At M output, its AR is ME.
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AVC is MG.
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AC is MF.
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AR is not only less than SAC but also AVC.
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Let us view it like this –
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Its Total Variable Cost is ONGM.
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Total Fixed Cost is NHFG.
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Total Cost is OHFM.
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Total Revenue is OPEM.
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As the firm is unable to cover its Variable Cost,
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it will quit the industry.
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We can also say,
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the price is not high enough to cover
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its Variable cost even.
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So, the firm will close down its business.
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When will the firm decide to stay
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in the industry in spite of loss?
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Look at this graph.
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Here also AVC is the AVC curve.
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When output is M,
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AVC is MK.
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AR is ME.
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AC is MF.
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AR is greater than AVC
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but less than AC.
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Its Total Variable Cost is OLKM.
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Its Total Fixed Cost is LHFK.
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Total Cost is OHFM.
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Its Total Revenue is OPEM.
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Revenue covers Variable cost in full
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and a part of Fixed Cost.
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The net loss is PHFE.
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Though the firm suffers loss,
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it is able to cover the Variable Cost in full
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and a part of the Fixed cost.
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Under such circumstance,
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the firm will go ahead with the hope of
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covering the Fixed Cost in the long run.
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The conclusion is
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if the market price is high enough
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to cover at least the variable cost,
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the competitive firm will not leave the industry.
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Kindly listen to the lesson –
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‘shut-down point’ also.
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We shall meet again
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in the long-run equilibrium of a competitive firm.
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