Question

State the conditions of short-run equilibrium of the firm under perfect competition.

Answer 1

The conditions of short-run equilibrium of a firm under perfect competition are:

1. Profit Maximization Condition: The firm must produce enough output so that its Short-Run Marginal Cost (SMC) equals Marginal Revenue (MR). Because in perfect competition, price (P) = AR = MR, this condition becomes SMC = P. Also, the SMC curve must cut the MR curve from below in order to maximize profit.
2. Sustainability Condition: To be considered sustainable, the firm’s average revenue (AR) must be greater than or equal to its average variable cost (AVC). If AR < AVC, the firm may fail to pay its variable costs and close in the short run.