4.
Explanation
In perfect competition, a firm achieves equilibrium when it maximizes its profit. There are specific conditions that must be met for a firm to be in equilibrium under perfect competition:
1. Price Equals Marginal Cost (P = MC): In perfect competition, a firm is a price taker, meaning it cannot influence the market price. It must accept the prevailing market price as given. To maximize profit, the firm produces the quantity of output where the market price (P) equals its marginal cost (MC). This condition ensures that the firm is efficiently allocating resources.
2. Marginal Cost Equals Marginal Revenue (MC = MR):Under perfect competition, marginal revenue (MR) is equal to the market price because the firm can sell any quantity at that price without affecting it. Therefore, for profit maximization, a firm should produce at a level where marginal
cost equals marginal revenue.
3. Short-Run vs. Long-Run Equilibrium:
- In the short run, the firm may incur losses or earn profits. As long as the price is above the average variable cost (P > AVC), the firm continues to produce in the short run.
- In the long run, the firm achieves equilibrium when it earns zero economic profit (normal profit). This occurs when the price equals the average total cost (P = ATC). If the price is below average total cost (P < ATC) in the long run, the firm exits the market.
3. Freedom of Entry and Exit: Perfect competition assumes that there are no barriers to entry or exit for firms in the industry. Firms can enter or leave the market freely in response to profits or losses. This ensures that in the long run, firms earn zero economic profit.
4. Homogeneous Products: Firms in perfect competition produce identical or homogeneous products, so consumers perceive them as perfect substitutes. This condition ensures that consumers make purchasing decisions based solely on price.
5. Perfect Information: Both buyers and sellers have access to perfect information about prices and product quality. This eliminates information asymmetry and ensures that firms and consumers can make informed decisions.
Conclusion : A firm in perfect competition achieves equilibrium when it produces the quantity of output where price equals marginal cost (P = MC) in the short run. In the long run, it earns zero economic profit (P = ATC) due to the freedom of entry and exit. These conditions reflect the efficient allocation of resources in a perfectly competitive market.