What are the characteristics of a firm in the short run equilibrium in microeconomics?
Answers
Answer:
(i) The First condition for equilibrium of the firm in the short-run is that it must ensure that SMC = MR, and SMC curve cuts the MR curve from below. Since for the perfectly competitive firm MR = AR = Price (P), it follows that this condition can be stated as SMC = P. This is the profit-maximisation rule.
(ii) It is possible that a firm under perfect competition, while maximising its profits, may in fact be earning super-normal (abnormal) profits, incurring losses or just earning normal profits. Whether a firm earns abnormal profits or normal profits or incurs losses depends on its cost and revenue conditions. In terms of this, we can say that a firm in the short-run will be in equilibrium when Price or AR & SAC.
All three of these are possible equilibrium positions in the short-run. If AR > SAC, it means the firm is earning abnormal or supernormal profits. If AR < SAC (but > AVC), then the firm is incurring losses. But if AR = SAC, it means that the firm is earning only normal profits.
Explanation:
Thus, short-run equilibrium conditions of a firm are:
1. SMC = MR
2. AR >/< SAC