Updated NCERT Solutions for Class 11 Micro Economics Chapter 4 | Important Questions (2026-27)

A perfectly competitive market has the following key characteristics:

1. Large Number of Buyers and Sellers: The market consists of so many buyers and sellers that no single individual can influence the market price. Each firm's contribution to the total output is negligible.
2. Homogeneous Product: All firms in the market sell identical products. There is no difference in quality, design, or packaging. A buyer has no reason to prefer one seller's product over another's.
3. Free Entry and Exit of Firms: There are no barriers to entry for new firms or exit for existing firms. If there are super-normal profits, new firms will enter. If firms are making losses, they can leave the market.
4. Perfect Knowledge: Both buyers and sellers have complete information about the product's price and quality. This ensures that a single price prevails in the market.
5. Perfect Mobility of Factors of Production: Factors of production (land, labour, capital, etc.) can move freely from one industry to another to seek better remuneration.
6. No Transportation Costs: It is assumed that there are no costs involved in transporting goods from one place to another, which helps in maintaining a uniform price.

The relationship between Total Revenue (TR), market price (P), and quantity sold (q) is direct and simple. Total Revenue is the total earnings of a firm from selling a certain quantity of its product at a given market price.

The formula is: Total Revenue (TR) = Market Price (P) × Quantity Sold (q)

For example, if the market price of a pen is ₹10 and a firm sells 100 pens, its Total Revenue will be:
TR = 10 × 100 = ₹1,000

In a perfectly competitive market, the firm is a price taker, so the market price (P) is constant. Therefore, TR increases at a constant rate as the quantity sold increases. The TR curve is a straight line starting from the origin.

The 'price line' represents the relationship between the output level and the market price. In a perfectly competitive market, a firm can sell any quantity of output at the market-determined price.

• Since the price (P) is constant, the Average Revenue (AR) and Marginal Revenue (MR) are also constant and equal to the price.
• P = AR = MR
• Graphically, the price line is a horizontal straight line parallel to the X-axis (output axis) at the level of the market price. This line is also the firm's demand curve, AR curve, and MR curve.

The total revenue (TR) curve of a price-taking firm is a straight line passing through the origin for two main reasons:

1. Constant Price: In perfect competition, the firm is a price taker. It has to sell its product at the price determined by the market. This price (P) remains constant regardless of how much quantity (q) the firm sells.
2. Proportional Relationship: Since TR = P × q, and P is constant, TR is directly and proportionally related to the quantity sold (q).
   • If q = 0, TR = P × 0 = 0. This means the TR curve must start from the origin (0,0).
   • As q increases by one unit, TR increases by a constant amount, which is the price (P). For example, if P=₹10, TR will be ₹10, ₹20, ₹30, etc., for 1, 2, 3 units sold.

Because TR increases at a constant rate, its graphical representation is an upward-sloping straight line starting from the origin.

For a price-taking firm (in a perfectly competitive market), the market price (P) is always equal to its Average Revenue (AR).

Here's the proof:

1. We know that Total Revenue (TR) = Price (P) × Quantity (q).
2. We also know that Average Revenue (AR) = Total Revenue (TR) / Quantity (q).

Now, substitute the value of TR from equation (1) into equation (2):

AR = (P × q) / q

AR = P

Therefore, the market price and the average revenue of a price-taking firm are always equal. This is why the price line is also the AR curve for the firm.

For a price-taking firm, the market price (P) is always equal to its Marginal Revenue (MR).

Here's the explanation:

1. Marginal Revenue (MR) is the change in Total Revenue (TR) from selling one additional unit of output.
2. In perfect competition, the price (P) is constant.
3. Let's say a firm sells 'q' units at price 'P'. Its TR is `P × q`.
4. If it sells one more unit ('q+1'), its new TR will be `P × (q+1) = Pq + P`.
5. The change in TR (which is MR) is: `(Pq + P) - Pq = P`.

So, for every additional unit sold, the total revenue increases by an amount equal to the price.
Therefore, MR = P.

Since we already know P = AR, the complete relation in perfect competition is P = AR = MR.

A firm is said to be in equilibrium and maximizing its profit when it produces a level of output that satisfies the following three conditions:

1. Price (P) must be equal to Marginal Cost (MC): In perfect competition, this is stated as MR = MC since P = MR. This is the primary condition. It means the cost of producing the last unit (MC) is exactly equal to the revenue earned from selling it (MR).
2. Marginal Cost (MC) must be non-decreasing (or rising) at the equilibrium point: Simply equating MR and MC is not enough. The MC curve must be rising at the point of intersection. If MC is falling, it means the cost of producing an extra unit is decreasing, so the firm can increase its profit by producing more.
3. Price (P) must be greater than or equal to Average Variable Cost (AVC) in the short run: For the firm to continue producing, the price must cover at least its per-unit variable costs. If P < AVC, the firm will shut down production to minimize losses. In the long run, P must be greater than or equal to Average Cost (AC).

Profit is calculated as Total Revenue (TR) - Total Cost (TC). Let's assume the following table shows the TR and TC for a firm at different output levels.

Steps:

1. We create a 'Profit' column by subtracting the TC from the TR for each level of output.
2. By observing the 'Profit' column, we can see that the maximum profit is ₹6.
3. This maximum profit is achieved at two output levels: 4 units and 5 units.

Therefore, the firm's profit-maximizing output level is either 4 or 5 units, where it earns a maximum profit of ₹6.

Given, Price (P) = ₹10. We need to calculate Total Revenue (TR = P × q) and Profit (π = TR - TC).

From the table, we can see that the profit is maximized at an output level of 6 units, where the firm earns a profit of ₹13.

Therefore, the profit-maximizing level of output is 6 units.

No, a profit-maximizing firm in a competitive market will not produce a positive level of output in the short run if the market price is less than the minimum of its Average Variable Cost (AVC). This situation is the shutdown condition.

Here's the reasoning:

1. A firm's short-run costs are divided into Fixed Costs (FC) and Variable Costs (VC). Fixed costs have to be paid even if the output is zero.
2. If the firm produces, its total loss is `TC - TR`. If it shuts down (produces zero output), its loss is equal to its Total Fixed Cost (TFC).
3. The condition `P < AVC` means that for every unit produced, the revenue earned (Price) is not even enough to cover the variable cost of producing it (AVC).
4. By producing, the firm not only loses all its fixed costs but also loses an additional amount on every unit sold (`AVC - P`).
5. By shutting down, the firm only loses its fixed costs.
6. Therefore, to minimize its losses, the firm will choose to shut down production temporarily. It will only resume production if the market price rises to be at least equal to the minimum AVC.

No, a profit-maximizing firm in a competitive market will not produce a positive level of output in the long run if the market price is less than the minimum of its Average Cost (AC).

Here's the reasoning:

1. In the long run, all costs are variable. There are no fixed costs. A firm can choose to enter or exit the industry freely.
2. The condition `P < AC` (or `AR < AC`) means that the revenue per unit is less than the cost per unit. This implies the firm is making a loss (`TR < TC`).
3. A firm cannot sustain losses indefinitely. In the long run, if it cannot cover all its costs, it is not a viable business.
4. Therefore, if the market price remains below the minimum AC, the firm will exit the market to avoid further losses. In the long run, a firm must earn at least normal profit (where P = AC) to stay in the market.

The short-run supply curve of a firm in a perfectly competitive market is the rising portion of its Short-run Marginal Cost (SMC) curve that lies above the minimum point of the Average Variable Cost (AVC) curve.

Here's a breakdown of this definition:

1. A firm's supply decision is based on its profit maximization goal. A firm supplies that level of output where P = MC (and MC is rising).
2. This means that for any given price, the quantity the firm will supply can be found on its MC curve. This suggests the MC curve is the supply curve.
3. However, there's a caveat: the shutdown condition. A firm will only produce if the price is at least equal to its minimum AVC. If `P < AVC`, the firm supplies zero output.
4. Therefore, the supply curve does not exist below the minimum AVC point (the shutdown point).

In summary:

• For any price P ≥ minimum AVC, the firm's supply curve is the upward-sloping part of its SMC curve.
• For any price P < minimum AVC, the firm's supply is zero.

The long-run supply curve of a firm in a perfectly competitive market is the rising portion of its Long-run Marginal Cost (LMC) curve that lies above the minimum point of the Long-run Average Cost (LAC) curve.

Explanation:

1. Similar to the short run, a firm in the long run will produce where P = LMC (and LMC is rising) to maximize profit.
2. However, in the long run, a firm must cover all its costs to remain in the industry. If the price falls below the Long-run Average Cost (LAC), the firm will be making losses and will exit the market.
3. The minimum point of the LAC curve represents the break-even price, below which the firm cannot survive in the long run.

In summary:

• For any price P ≥ minimum LAC, the firm's supply curve is the upward-sloping part of its LMC curve.
• For any price P < minimum LAC, the firm will exit the industry, and its supply will be zero.

Technological progress generally leads to a rightward shift in the supply curve of a firm.

Here's the detailed impact:

1. Lower Costs of Production: Technological advancements, such as new machinery or more efficient production processes, reduce the firm's marginal cost (MC) and average cost (AC) of producing each level of output. The entire MC curve shifts downwards and to the right.
2. Increased Profitability at the Same Price: Since the cost of production has decreased, producing each unit becomes more profitable at the existing market price.
3. Willingness to Supply More: Because production is now cheaper and more profitable, the firm is willing and able to supply a larger quantity of the good at any given price.

Graphical Impact:
The firm's supply curve is its MC curve (above min AVC). When technology improves, the MC curve shifts down and to the right. This means that for the same price, the firm will now produce a higher quantity. This constitutes a rightward shift of the entire supply curve.

The 'free entry and exit' feature has a crucial implication: firms earn only normal profits in the long run.

• Entry of New Firms: If existing firms are earning super-normal profits (Price > AC), it attracts new firms to enter the market. This increases market supply, which in turn pushes the market price down until it equals the minimum AC. Super-normal profits are thus wiped out.
• Exit of Existing Firms: If existing firms are incurring losses (Price < AC), some firms will exit the market. This reduces market supply, which causes the market price to rise until it equals the minimum AC. Losses are eliminated.

Therefore, due to free entry and exit, the long-run equilibrium is established at a point where P = Minimum AC, and firms earn only normal profits.

A firm under perfect competition is a 'price taker' due to two main reasons:

1. Large Number of Sellers: The market has numerous firms, each producing a tiny fraction of the total market output. A single firm's decision to increase or decrease its output has a negligible impact on the total market supply and hence, cannot influence the market price.
2. Homogeneous Product: All firms sell identical products. If a single firm tries to charge a higher price, buyers will immediately switch to other sellers offering the same product at the market price. The firm would lose all its customers.

Therefore, the firm has no choice but to accept the price determined by the market forces of demand and supply.

In perfect competition, Price (P) is constant. This leads to a specific relationship where P = AR = MR.

• AR = P: Average Revenue is always equal to the price.
• MR = P: Marginal Revenue is also always equal to the price because every additional unit is sold at the same constant price.

Schedule (Assume Market Price P = ₹10):

Explanation with Diagram:

The TR curve is an upward-sloping straight line from the origin because TR increases at a constant rate (the price). The AR and MR curves are the same and are represented by a horizontal straight line parallel to the X-axis, at the level of the market price.

(Diagram: A graph with Output on X-axis and Revenue on Y-axis. The TR curve is a 45-degree line from the origin. The P=AR=MR curve is a horizontal line at P=10.)

A firm is in short-run equilibrium when it maximizes its profit or minimizes its losses by producing the quantity where SMC = MR and SMC is rising.

Equilibrium Conditions:

1. MR = SMC
2. SMC curve must cut the MR curve from below.
3. Price (AR) ≥ AVC

(a) Super-normal Profit (AR > SAC)

A firm earns super-normal profits when the market price (AR) is greater than the average cost (SAC) at the equilibrium level of output.

(Diagram: Draw the horizontal P=AR=MR line. Draw the U-shaped SAC curve so that its minimum point is below the AR line. Draw the SMC curve cutting SAC at its minimum and intersecting the AR line at point E from below.)

• In the diagram, equilibrium is at point E, where SMC = MR. The equilibrium output is OQ.
• At output OQ, Price = EQ and Average Cost = BQ.
• Since EQ > BQ, the firm earns a super-normal profit.
• Total Revenue (TR) = OPEQ, Total Cost (TC) = OCBQ
• Super-normal Profit (π) = TR - TC = Area CBEP.

(b) Losses (AR < SAC)

A firm incurs losses when the market price (AR) is less than the average cost (SAC) but above the average variable cost (AVC).

(Diagram: Draw the horizontal P=AR=MR line. Draw the U-shaped SAC curve so that its minimum point is above the AR line. Draw the SMC curve intersecting the AR line at E.)

• In the diagram, equilibrium is at point E, where SMC = MR. The equilibrium output is OQ.
• At output OQ, Price = EQ and Average Cost = BQ.
• Since EQ < BQ, the firm incurs a loss.
• Total Revenue (TR) = OPEQ, Total Cost (TC) = OABQ
• Loss = TC - TR = Area PABE.

(i) What is Ramesh's fixed cost? (1 mark)

The fixed cost is the cost incurred at zero output. From the table, when output is 0 kg, TC is ₹10. Therefore, Total Fixed Cost (TFC) = ₹10.

(ii) Calculate the profit-maximizing output for Ramesh using the MR-MC approach. (3 marks)

Given Price = ₹20, so MR = ₹20. We calculate MC.

A rational producer will expand output as long as MR ≥ MC. He will continue to produce units 1, 2, 3, 4, and 5 because for each of these units, the marginal revenue (₹20) is greater than the marginal cost.

By calculating the profit at each level, we see that profit is maximum (₹33) at an output of 5 units.