Class 11 Economics Chapter 13 Question Answer | The Theory of the Firm under Perfect Competition | English Medium | ASSEB
Welcome to HSLC Guru! In this article, we present a complete English-medium guide to Class 11 Economics Chapter 13 — The Theory of the Firm under Perfect Competition, prepared strictly according to the latest ASSEB (Assam State School Education Board) syllabus. This chapter explains how firms behave in a perfectly competitive market, how prices and output are determined, and how the supply curve of a firm and industry is derived. The notes include a clear summary, complete textbook question answers (1, 2-3, and 5-6 marks), additional MCQs, fill in the blanks, true/false questions, and a glossary table for quick revision. Whether you are preparing for unit tests, half-yearly exams, or the final ASSEB Class 11 Economics examination, this study material will help you master the topic with confidence.
Summary of the Chapter
A market is said to be perfectly competitive when it satisfies certain very strict conditions. The most important features are: (i) a very large number of buyers and sellers, so that no individual buyer or seller can influence the market price; (ii) a homogeneous product sold by all firms, so that buyers are indifferent between sellers; (iii) free entry and free exit of firms in the long run, which ensures that abnormal profits or losses cannot persist; (iv) perfect information available to both buyers and sellers regarding price, quality and market conditions; and (v) the firm acts as a price-taker, accepting the price determined by the market forces of demand and supply. Because of these features, the demand curve faced by an individual firm is a horizontal straight line at the prevailing market price, while the market demand curve as a whole is downward sloping.
The chapter introduces three key revenue concepts. Total Revenue (TR) is the total amount of money a firm receives from selling a given quantity of output, calculated as TR = P × Q. Average Revenue (AR) is the revenue earned per unit of output, AR = TR / Q, which equals the price of the product. Marginal Revenue (MR) is the addition to total revenue from selling one extra unit of output. Under perfect competition, since the firm sells every unit at the same market-determined price, all three concepts are linked by the simple identity AR = MR = Price (P). The TR curve is therefore an upward-sloping straight line from the origin, while AR and MR are represented by the same horizontal line at the prevailing price.
For profit maximisation, a firm must satisfy two conditions. First, MR must be equal to MC at the chosen output level. Second, MC must cut MR from below, i.e. MC must be rising at the equilibrium point — otherwise the firm will be at a loss-maximising point. Additionally, in the short run, the firm continues production only if price is at least equal to the minimum of Average Variable Cost (AVC). If P falls below minimum AVC, the firm prefers to shut down because operating losses exceed fixed costs. In the long run, the firm produces only if price is at least equal to minimum Average Cost (AC); otherwise, free exit will reduce industry supply until price recovers.
The short-run supply curve of a firm is therefore that portion of its rising MC curve which lies above the minimum point of AVC. The long-run supply curve is the portion of the rising long-run MC curve above the minimum of long-run AC. The market (industry) supply curve is obtained by horizontal summation of the supply curves of all firms in the industry. The price elasticity of supply measures the responsiveness of quantity supplied to changes in price, and depends on factors like time period, availability of inputs, technology, nature of the commodity, and ease of stock-holding.
Textbook Questions and Answers
1-Mark Questions
Q1. What is a perfectly competitive market?
Answer: A perfectly competitive market is a market structure in which there are a very large number of buyers and sellers dealing in a homogeneous product at a uniform price determined by the market.
Q2. Why is a firm under perfect competition called a price-taker?
Answer: A firm is called a price-taker because it cannot influence the market price by changing its own output; it simply accepts the price determined by the industry’s demand and supply.
Q3. Define Total Revenue (TR).
Answer: Total Revenue is the total money receipt of a firm from selling a given quantity of a product, calculated as TR = Price × Quantity (P × Q).
Q4. Define Average Revenue (AR).
Answer: Average Revenue is the revenue per unit of output sold, given by AR = TR / Q. Under perfect competition, AR is equal to the market price.
Q5. Define Marginal Revenue (MR).
Answer: Marginal Revenue is the addition to total revenue from selling one additional unit of output, i.e., MR = ΔTR / ΔQ.
Q6. Why is AR = MR = P under perfect competition?
Answer: Because the firm sells every unit at the same market price, the price received per unit (AR) and the addition to revenue from each extra unit (MR) are both equal to the price (P).
Q7. What is the shape of the demand curve faced by a firm under perfect competition?
Answer: It is a horizontal straight line parallel to the X-axis at the prevailing market price, indicating perfectly elastic demand.
Q8. What is the shut-down point of a firm in the short run?
Answer: The shut-down point is the minimum point of the Average Variable Cost (AVC) curve. Below this price, the firm prefers to stop production in the short run.
Q9. What is the long-run break-even point of a firm?
Answer: It is the minimum point of the long-run Average Cost (LAC) curve, where the firm earns just normal profit.
Q10. Define price elasticity of supply.
Answer: Price elasticity of supply is the percentage change in quantity supplied of a commodity divided by the percentage change in its price.
2 to 3 Marks Questions
Q1. State any three features of a perfectly competitive market.
Answer: (i) Large number of buyers and sellers: No single buyer or seller can affect the market price. (ii) Homogeneous product: The product sold by all firms is identical in every respect. (iii) Free entry and exit: Firms can freely enter or leave the industry in the long run, so abnormal profits or losses do not persist.
Q2. Explain the relationship between TR, AR and MR under perfect competition.
Answer: Under perfect competition, the firm sells each unit of output at a constant market price. Therefore:
- TR = P × Q (a straight line through the origin).
- AR = TR / Q = P.
- MR = ΔTR / ΔQ = P.
- Hence, AR = MR = P, and both AR and MR are represented by the same horizontal line.
Q3. Why is the demand curve of a firm under perfect competition perfectly elastic?
Answer: Because the product is homogeneous and there are many sellers selling at the same price, a firm cannot raise its price even slightly without losing all its customers, and it has no incentive to lower the price as it can sell any amount at the existing price. Hence, the demand curve faced by an individual firm is a horizontal line, i.e., perfectly elastic.
Q4. State the conditions of profit maximisation of a firm.
Answer: A firm maximises profit when the following two conditions are simultaneously satisfied:
- MR = MC at the chosen level of output.
- MC must cut MR from below, i.e., MC must be rising at the equilibrium point.
- Additionally, price must not be less than minimum AVC in the short run, and not less than minimum AC in the long run.
Q5. Distinguish between the short-run supply curve and the long-run supply curve of a firm.
Answer: (i) The short-run supply curve is that part of the rising MC curve which lies above the minimum point of AVC. (ii) The long-run supply curve is the part of the rising long-run MC curve which lies above the minimum point of long-run AC. (iii) In the short run the firm may continue even with losses (covering only variable cost), but in the long run it must cover all costs.
Q6. What do you mean by market supply curve? How is it derived?
Answer: The market supply curve shows the total quantity of a commodity that all firms in the industry are willing to supply at different prices. It is obtained by the horizontal summation of the individual supply curves of all firms operating in the industry at each price level.
5 to 6 Marks Questions
Q1. Discuss the main features of a perfectly competitive market.
Answer: The main features of a perfectly competitive market are:
- Large number of buyers and sellers: Each one’s share is so small that no individual can influence the market price by his action alone.
- Homogeneous product: All firms sell an identical product, so buyers have no preference for any particular seller.
- Free entry and free exit: Firms can enter the market when there are super-normal profits and leave when there are losses, ensuring only normal profit in the long run.
- Perfect knowledge: Buyers and sellers have full information about prices, costs, quality and market conditions, ruling out price discrimination.
- Price-taking behaviour: The firm accepts the market price as given and adjusts only its quantity.
- Perfect mobility of factors: Factors of production move freely between firms and industries, leading to a single uniform price.
Q2. Explain the concepts of TR, AR and MR with the help of a numerical example. Show that under perfect competition AR = MR = P.
Answer: Suppose the market price of a homogeneous product is Rs. 10. As the firm is a price-taker, it sells every unit at Rs. 10.
| Quantity (Q) | Price (P) | TR = P × Q | AR = TR/Q | MR = ΔTR/ΔQ |
|---|---|---|---|---|
| 1 | 10 | 10 | 10 | 10 |
| 2 | 10 | 20 | 10 | 10 |
| 3 | 10 | 30 | 10 | 10 |
| 4 | 10 | 40 | 10 | 10 |
| 5 | 10 | 50 | 10 | 10 |
From the table, TR rises by a constant amount (Rs. 10) as Q increases. AR remains Rs. 10 throughout, and MR is also Rs. 10 for every additional unit. Hence, under perfect competition, AR = MR = Price, and the AR-MR curve is a horizontal straight line at the market price.
Q2. Explain the equilibrium of a firm under perfect competition with the help of MR-MC approach.
Answer: Under perfect competition, the firm is a price-taker. Therefore, the price line acts as the AR = MR curve. The firm produces that level of output at which it earns maximum profit. Two conditions must hold:
- MR = MC — at this output, additional revenue from one more unit equals its additional cost.
- MC must cut MR from below — that is, MC must be rising; otherwise, the firm will be at a loss-maximising point.
If at the equilibrium output, P (= AR) > AC, the firm earns super-normal profit; if P = AC, only normal profit; and if P < AC but ≥ AVC, the firm continues with losses in the short run. If P falls below AVC, the firm shuts down. In the long run, free entry and exit drive economic profit to zero, so the firm earns only normal profit at P = minimum LAC.
Q3. Derive the short-run supply curve of a firm under perfect competition.
Answer: The supply curve of a firm shows the quantity it is willing to supply at different prices. Since the firm equates P = MC for profit maximisation, the MC curve indicates the quantity supplied at each price. However, the firm will produce only if price covers at least the average variable cost.
- If P < minimum AVC → firm shuts down; quantity supplied = 0.
- If P = minimum AVC → shut-down point; firm is indifferent between producing and not producing.
- If P > minimum AVC → firm produces where P = MC.
Therefore, the short-run supply curve of a firm under perfect competition is that portion of the rising MC curve which lies above the minimum point of the AVC curve. Below this point, supply is zero.
Q4. Explain the determinants of the price elasticity of supply.
Answer: The main factors influencing price elasticity of supply are:
- Time period: Supply is more elastic in the long run than in the short run, as firms get more time to adjust capacity.
- Nature of the commodity: Perishable goods have less elastic supply; durable goods have more elastic supply.
- Availability of inputs: If raw materials and labour are easily available, supply is more elastic.
- Technology: Advanced and flexible technology allows quick changes in output, raising elasticity.
- Cost conditions: If marginal cost rises sharply with output, supply becomes inelastic; if it rises slowly, supply is more elastic.
- Stock holding: Goods that can be stored have more elastic supply because firms can release stocks when prices rise.
Q5. How is the market supply curve derived? Why is the long-run market supply curve generally flatter than the short-run market supply curve?
Answer: The market (industry) supply curve is obtained by the horizontal summation of the supply curves of all individual firms in the industry. At each price, the quantities supplied by all firms are added to get the total market supply.
The long-run market supply curve is flatter (more elastic) than the short-run market supply curve because:
- In the long run, firms can adjust all factors of production, including plant size.
- New firms can enter the industry when price rises, expanding total supply.
- Existing firms can exit when price falls, reducing total supply.
- Therefore, a small change in price brings about a larger change in quantity supplied in the long run.
Additional MCQs
Q1. Under perfect competition, the firm is a:
(a) Price-maker (b) Price-taker (c) Price-leader (d) Monopolist
Answer: (b) Price-taker.
Q2. The demand curve of a firm under perfect competition is:
(a) Downward sloping (b) Upward sloping (c) Horizontal straight line (d) Vertical straight line
Answer: (c) Horizontal straight line.
Q3. Under perfect competition:
(a) AR > MR (b) AR < MR (c) AR = MR = Price (d) None of these
Answer: (c) AR = MR = Price.
Q4. Profit is maximised when:
(a) MR = MC and MC is rising (b) MR > MC (c) MR < MC (d) AR = AC
Answer: (a) MR = MC and MC is rising.
Q5. The short-run supply curve of a firm is the rising portion of the MC curve above:
(a) Minimum AC (b) Minimum AVC (c) Minimum AFC (d) Maximum MC
Answer: (b) Minimum AVC.
Q6. The long-run supply curve of a firm is the rising portion of the long-run MC curve above:
(a) Minimum AVC (b) Minimum AC (c) Maximum AC (d) None of these
Answer: (b) Minimum AC.
Q7. The market supply curve is obtained by:
(a) Vertical summation of firms’ supply curves (b) Horizontal summation of firms’ supply curves (c) Adding demand curves (d) None of these
Answer: (b) Horizontal summation of firms’ supply curves.
Q8. Free entry and exit of firms ensures in the long run:
(a) Super-normal profit (b) Normal profit only (c) Loss (d) Zero output
Answer: (b) Normal profit only.
Q9. A firm shuts down in the short run if price is less than:
(a) Minimum AC (b) Minimum AVC (c) Minimum AFC (d) Marginal Cost
Answer: (b) Minimum AVC.
Q10. Price elasticity of supply is calculated as:
(a) % change in price / % change in quantity supplied (b) % change in quantity supplied / % change in price (c) Change in TR / Change in Q (d) None of these
Answer: (b) % change in quantity supplied / % change in price.
Fill in the Blanks
Q1. Under perfect competition, the firm is a __________.
Answer: price-taker.
Q2. AR is equal to __________ under perfect competition.
Answer: price (and to MR).
Q3. A firm reaches equilibrium when MR = __________ and MC cuts MR from __________.
Answer: MC; below.
Q4. The short-run supply curve of a firm is the rising portion of MC above the minimum point of __________.
Answer: AVC.
Q5. Market supply curve is obtained by __________ summation of individual firms’ supply curves.
Answer: horizontal.
True or False
Q1. The product sold under perfect competition is heterogeneous.
Answer: False. The product is homogeneous (identical).
Q2. Under perfect competition AR is greater than MR.
Answer: False. AR = MR = Price.
Q3. The minimum point of AVC is called the shut-down point in the short run.
Answer: True.
Q4. Free entry and exit are absent in a perfectly competitive market.
Answer: False. Free entry and exit are essential features of perfect competition.
Q5. The long-run market supply curve is generally more elastic than the short-run market supply curve.
Answer: True. In the long run, firms can adjust all factors and can enter or exit the industry.
Glossary
| Term | Meaning |
|---|---|
| Perfect Competition | A market with many buyers and sellers dealing in a homogeneous product, with free entry-exit and perfect information. |
| Price-Taker | A firm that accepts the market-determined price as given and cannot influence it. |
| Homogeneous Product | An identical product sold by all firms, indistinguishable in quality and features. |
| Total Revenue (TR) | Total money receipt of a firm; TR = P × Q. |
| Average Revenue (AR) | Revenue per unit; AR = TR / Q. Equal to price under perfect competition. |
| Marginal Revenue (MR) | Addition to TR from selling one more unit; MR = ΔTR / ΔQ. |
| Profit Maximisation | The output level where MR = MC and MC cuts MR from below. |
| Shut-down Point | The minimum point of the AVC curve in the short run, below which the firm stops production. |
| Break-even Point | The minimum point of LAC, where the firm earns just normal profit in the long run. |
| Short-run Supply Curve | Rising portion of MC above minimum AVC. |
| Long-run Supply Curve | Rising portion of long-run MC above minimum LAC. |
| Market Supply Curve | Horizontal summation of supply curves of all firms in the industry. |
| Price Elasticity of Supply | Percentage change in quantity supplied divided by percentage change in price. |
| Free Entry and Exit | Freedom of firms to enter or leave the industry, ensuring only normal profit in the long run. |
| Normal Profit | The minimum return required to keep a firm in the industry; included in cost. |
Keep visiting HSLC Guru for more chapter-wise English-medium notes, question answers, and revision material for ASSEB Class 11 Economics. Best wishes for your exams!