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Class 12 The Theory of the Firm under Perfect Competition: cheat sheet
CBSE Social Science. A price-taking firm: total, average and marginal revenue, profit maximisation at p = MC, the shut down and break-even points, supply curves and price elasticity of supply.
Key ideas
- Perfect competition has many buyers and sellers, an identical product, free entry and exit and perfect information, so each firm is a price taker.
- A competitive firm faces a horizontal demand curve at the market price, so AR = MR = price and TR is a straight line from the origin.
- Profit is greatest where price equals MC on the rising part of the MC curve, as long as price is at least minimum AVC.
- In the short run a firm keeps producing at a loss if price covers AVC; below minimum AVC it shuts down.
- At the break-even point price equals minimum AC: TR = TC and the firm earns only normal profit.
- The firm’s short-run supply curve is the rising part of MC above minimum AVC; better technology shifts it right, while a unit tax or dearer inputs shift it left.
- Market supply is the horizontal sum of firms’ supply curves.
Remember
| Revenue | TR = p × q; AR = TR ÷ q = p; MR = ΔTR ÷ Δq = p |
| Profit-maximising output | p = MC, with MC rising, and p ≥ AVC |
| Profit | (p − AC) × q = TR − TC; TC = TFC + AVC × q |
| Shut down point (short run) | p = minimum AVC |
| Break-even point | p = minimum AC |
| Price elasticity of supply | eS = % change in quantity supplied ÷ % change in price |
| Market supply (n identical firms) | n × each firm’s quantity |
Watch out
- Choosing output on the falling part of MC where p = MC (it must be the rising part).
- Shutting down whenever there is a loss: in the short run the firm stays open if price covers AVC.
- Mixing up the shut down point (min AVC) and the break-even point (min AC).
Worked example
A competitive firm sells 140 units at ₹45. Its TFC is ₹470 and its AVC is ₹24. Find TR, TC and profit.
Working: TR = 45 × 140; TC = 470 + 24 × 140
Answer: TR ₹6,300, TC ₹3,830, profit ₹2,470
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