NCERT

Every NCERT book that matters for UPSC — open a book, then a chapter. Learn each chapter's concepts, then how UPSC tests them — with diagrams, flowcharts and the past questions to attempt.

Class 6	Exploring Society: India and Beyond	Social Science	14 of 14
Class 7	Our Environment	Geography	7 of 7
Class 7	Our Pasts – II	History	8 of 8
Class 7	Social and Political Life – II	Polity	8 of 8
Class 8	Resource and Development	Geography	5 of 5
Class 8	Our Pasts – III	History	8 of 8
Class 8	Social and Political Life – III	Polity	8 of 8
Class 9	Exploration	Science	3 of 13
Class 9	Understanding Society: India and Beyond – I	Social Science	9 of 9
Class 9	Understanding Society: India and Beyond – II	Social Science	6 of 6
Class 10	Understanding Economic Development	Economics	5 of 5
Class 10	Contemporary India – II	Geography	7 of 7
Class 10	India and the Contemporary World – II	History	5 of 5
Class 10	Democratic Politics – II	Polity	5 of 5
Class 10	Science	Science	13 of 13
Class 11	An Introduction to Indian Art – Part I	Art & Culture	8 of 8
Class 11	Biology	Biology	4 of 19
Class 11	Indian Economic Development	Economics	8 of 8
Class 11	Fundamentals of Physical Geography	Geography	14 of 14
Class 11	India: Physical Environment	Geography	6 of 6
Class 11	Themes in World History	History	7 of 7
Class 11	Indian Constitution at Work	Polity	10 of 10
Class 11	Political Theory	Polity	8 of 8
Class 11	Psychology	Psychology	8 of 8
Class 11	Introducing Sociology	Sociology	5 of 5
Class 11	Understanding Society	Sociology	5 of 5
Class 12	Biology	Biology	13 of 13
Class 12	Introductory Macroeconomics	Economics	6 of 6
Class 12	Introductory Microeconomics	Economics	5 of 5
Class 12	Fundamentals of Human Geography	Geography	8 of 8
Class 12	India: People and Economy	Geography	9 of 9
Class 12	Themes in Indian History – I	History	4 of 4
Class 12	Themes in Indian History – II	History	4 of 4
Class 12	Themes in Indian History – III	History	4 of 4
Class 12	Contemporary World Politics	Polity	7 of 7
Class 12	Politics in India since Independence	Polity	8 of 8
Class 12	Psychology	Psychology	7 of 7
Class 12	Indian Society	Sociology	7 of 7
Class 12	Social Change and Development in India	Sociology	8 of 8

0% read

← Introductory Microeconomics — all chapters

Class 12EconomicsIntroductory MicroeconomicsChapter 4

The Theory of the Firm under Perfect Competition

≈ 45 min read · 0 Prelims and 0 Mains questions from this chapter

Attempt questions

Start here: why this chapter matters

In simple wordsA tomato seller in a huge wholesale mandi can't charge more than everyone else — buyers just walk to the next stall. She can only decide how many crates to bring. This chapter works out how many she brings at each price — and that, added up across sellers, is the supply curve.

This is Chapter 4 of Introductory Microeconomics: 17 pages (53–70) in seven sections — 4.1 features of perfect competition; 4.2 revenue; 4.3 profit maximisation (three conditions); 4.4 the firm's supply curve (short and long run, shut-down and break-even points); 4.5 determinants of supply (technology, input prices, a unit-tax box); 4.6 market supply; 4.7 price elasticity of supply — one table, fourteen figures, boxes on opportunity cost and a unit tax, and 27 exercise questions, nine numerical. All schedules are recomputed; we use NCERT's own Exercise 21 cost schedule as a fully worked example, and flag three slips.

Builds on Chapter 3 (leec203 — MC, AVC, SAC and their minima) and Chapter 1 (leec201 — opportunity cost). Leads into Chapter 5 (market equilibrium: market supply meets market demand; price ceilings and floors).
Pairs with live chapters: Indian Economic Development keec103 (liberalisation and competition) and keec105 (agricultural marketing); Introductory Macroeconomics leec105 (indirect taxes).
UPSC, honestly: we found no past Prelims or Mains question whose core is this chapter. Its value is conceptual: market forms, price taking, normal profit, supply shifts from taxes and technology, and supply elasticity appear inside questions on agriculture, taxation and competition policy.

Word	What it means here
Perfect competition	Many buyers and sellers, homogeneous product, free entry and exit, perfect information
Price taker	Cannot sell anything above the market price; can sell any amount at it
TR, AR, MR	p × q; TR per unit (= p); extra TR from one more unit (= p)
Price line	Horizontal line at the market price: AR, MR and the firm's demand curve
Profit (π)	TR − TC
Shut-down point	Minimum AVC (short run) or minimum LRAC (long run): below it, output is zero
Normal / supernormal profit	Minimum profit needed to stay in business (part of cost) / profit above it
Break-even point	Where the firm earns just normal profit — minimum average cost
Supply schedule / curve	Quantities a firm chooses to sell at each price, technology and input prices given
Unit tax	A tax of a fixed amount per unit sold
Market supply	Horizontal sum of firms' supplies at each price
Price elasticity of supply	% change in quantity supplied ÷ % change in price

Reading the chapter opening (page 53)NCERT states its key assumption frankly: the firm is a ‘ruthless profit maximiser’ — an assumption it calls ‘critical, if somewhat unreasonable’ — and output and sales are treated as the same. The point: the model is a simplification chosen for its clarity, and NCERT itself says the answer is ‘by no means simple or uncontroversial’.

At a glance — the six ideas to carry away

Perfect competition: many buyers and sellers, homogeneous product, free entry and exit, perfect information → every firm a price taker.
TR = p × q (a straight line through the origin, slope p); AR = MR = p; the price line is the firm's perfectly elastic demand curve.
Profit maximum: (1) p = MC; (2) MC not falling; (3) p ≥ AVC (short run) or p ≥ AC (long run).
Short-run supply = rising SMC from min AVC (shut-down point) up; long-run supply = rising LRMC from min LRAC. Break-even = min AC; normal profit is part of cost.
Supply shifts: technology → right; input price ↑ or unit tax → left. Market supply = horizontal sum; more firms → right.
Price elasticity of supply = %Δq ÷ %Δp (cricket balls: 400% ÷ 200% = 2); straight line through origin → 1; meets price axis → > 1; meets quantity axis → < 1.

1. Perfect competition and price taking

In simple wordsIf a hundred stalls sell identical onions and every buyer can see every price board, a stall that asks ₹2 more sells nothing, and a stall that asks less is giving money away. Every stall ends up charging the going price.

A perfectly competitive market has four defining features: (1) a large number of buyers and sellers, each tiny relative to the market, so none can influence it; (2) a homogeneous product — one firm's product cannot be told from another's; (3) free entry and exit, which is what allows numbers to stay large; (4) perfect information about price, quality and the market. Together they produce the single most distinguishing characteristic: price-taking behaviour. A price-taking firm believes it will sell nothing above the market price and as much as it wants at or below it; a price-taking buyer believes nobody will sell below the market price and she can buy as much as she wants at or above it. The logic: if one firm raised its price, informed buyers of an identical product would switch to the many other firms, which can absorb them without ‘adjustment’ problems.

⤵ From the four features to price taking

Many small firms and buyersno single one can move the market

Identical product, perfect informationbuyers know every price and don't care whose product it is

A firm raises its priceall its buyers switch to other firms

Free entry keeps numbers largethe others can absorb the buyers

Price takingeach firm treats the market price as given

View of perfect competition as a model (Beyond NCERT attribution)	Economists and works	Claim
A benchmark	Léon Walras (1874); Kenneth Arrow and Gérard Debreu (1954)	competitive markets can reach an efficient allocation — a yardstick for real markets
Imperfect and monopolistic competition	Joan Robinson, The Economics of Imperfect Competition; Edward Chamberlin, The Theory of Monopolistic Competition (both 1933)	most real firms face downward-sloping demand from differentiated products
Competition as a process	Friedrich Hayek, ‘The Meaning of Competition’ (1946)	the static model assumes away the discovery and rivalry that make competition valuable
Contestable markets	William Baumol and colleagues (1982)	even few firms may behave competitively if entry and exit are free

Beyond NCERT — closest real cases and Indian law

Markets for many farm products, foreign exchange or shares of large companies are often cited as close to perfect competition; most product markets are not.
India's Competition Act, 2002 (replacing the MRTP Act, 1969) set up the Competition Commission of India to check anti-competitive agreements, abuse of dominance and mergers.
NCERT's earlier syllabus had a chapter on non-competitive markets (monopoly, oligopoly, monopolistic competition); it is not in the current five-chapter book.

Exam traps

Price taking is the result of the four features, not a fifth feature.
Free entry and exit is what keeps the number of firms large.
Buyers are price takers too.

2. Revenue: TR, AR and MR

In simple wordsIf every box of candles sells for ₹10, then 1 box brings ₹10, 2 boxes ₹20, 5 boxes ₹50. The average per box is always ₹10, and each extra box always adds ₹10.

A price taker has no reason to set a price below the market price, so it sells at exactly p. Total revenue TR = p × q. Table 4.1 (candles at ₹10 a box): 0, 10, 20, 30, 40, 50 for 0–5 boxes. The TR curve (i) passes through the origin, (ii) rises, and (iii) is a straight line because p is constant, with slope p (Aq₁/Oq₁ = p × 1/1). Average revenue AR = TR/q = p: the horizontal price line, which is also the firm's demand curve, perfectly elastic. Marginal revenue MR = ΔTR/Δq; from Table 4.1, (30 − 20)/(3 − 2) = 10; in general (pq₂ − pq₁)/(q₂ − q₁) = p. So MR = AR = p: each extra unit sells at the market price.

Table 4.1 to scale: TR and the price line.

Reading Table 4.1 and Figures 4.1–4.2 (pages 54–55)Table 4.1 lists TR of 0, 10, 20, 30, 40, 50 for 0–5 boxes at ₹10; Fig. 4.1 draws the straight TR line with slope Aq₁/Oq₁ = p; Fig. 4.2 the horizontal price line. The point: for a price taker, revenue is simple — all the economics is on the cost side. We checked the table: every entry is 10 × boxes.

Exam traps

The firm's demand curve is horizontal (perfectly elastic); the market demand curve still slopes down.
Under perfect competition AR = MR = p; under other market forms MR < AR (Beyond NCERT).

3. Profit maximisation: three conditions

In simple wordsKeep making one more unit as long as it brings in more than it costs. Stop when the next unit would cost more than its price. And if, at the best output, you can't even cover the wages and raw materials, close down for now.

Profit π = TR − TC. At the profit-maximising output q₀ three conditions hold: (1) p = MC — while MR > MC an extra unit adds to profit, while MR < MC it subtracts, so profit peaks where MR = MC, and for a price taker MR = p; (2) MC is non-decreasing at q₀ — at a point where p = MC on the falling part of MC, producing a little less would raise profit (p < MC just to the left), so it cannot be the maximum; (3) p ≥ AVC in the short run, p ≥ AC in the long run — if p < AVC, revenue does not cover even variable cost, and producing nothing (a loss of just TFC) is better; in the long run a firm that shuts down earns zero, so it needs p ≥ AC. At q₀ the profit is the rectangle between price and SAC: (p − SAC) × q₀.

NCERT's Exercise 21 schedule, recomputed: TR, TC and profit.

q	TC	TR = 10q	Profit	MC	AVC	SAC
0	5	0	-5	–	–	–
1	15	10	-5	10	10	15
2	22	20	-2	7	8.5	11
3	27	30	3	5	7.33	9
4	31	40	9	4	6.5	7.75
5	38	50	12	7	6.6	7.6
6	49	60	11	11	7.33	8.17
7	63	70	7	14	8.29	9
8	81	80	-1	18	9.5	10.12
9	101	90	-11	20	10.67	11.22
10	123	100	-23	22	11.8	12.3

Exercise 21: the three conditions, shut-down and break-even, from NCERT's numbers.

Exercise 21 illustrates all three conditions. MC equals the price of ₹10 at q = 1 — but MC is falling there (10 → 7 → 5 → 4), and profit is −5: condition 2 rules it out. MC rises past ₹10 between q = 5 (MC 7) and q = 6 (MC 11); the sixth unit would cost 11 for a revenue of 10, so the firm stops at 5, earning ₹12 = (10 − 7.6) × 5, where 7.6 is SAC at q = 5. With TFC = ₹5 (cost at zero output), AVC is lowest at ₹6.5 (q = 4) — the shut-down price — and SAC lowest at ₹7.6 (q = 5) — the break-even price.

⤵ The profit-maximisation check (NCERT section 4.3)

Find where p = MCMR = p for a price taker

Is MC rising there?if MC is falling, a smaller output gives more profit

Short run: p ≥ AVC?if not, produce zero and lose only TFC

Long run: p ≥ AC?if not, exit and earn zero

Profit at q₀(p − SAC) × q₀: the rectangle in Fig. 4.6

Reading Figures 4.3–4.6 (pages 56–58)Fig. 4.3: p equals MC at q₁ (MC falling) and q₄; q₂, q₃ have p > MC, q₅, q₆ have MC > p — only q₄ can be optimal. Fig. 4.4: at q₁ with p below AVC, TVC (rectangle OEBq₁) exceeds TR (OpAq₁). Fig. 4.5: the long-run version with LRAC. Fig. 4.6: at q₀, profit is the rectangle EpAB between p and SAC. The point: marginal comparisons find the output, average comparisons decide whether to produce at all.

NCERT details to read carefully

Section 4.3 states condition 3 as a strict ‘p > AVC’ (and ‘p > AC’), but the case headings, derivations and Summary use ‘p ≥’. Safe line: the firm produces when p ≥ minimum AVC (short run).
Fig. 4.4 text: ‘the firm's profit at q₁ is [(area EBAp) − TFC]’. Since TVC exceeds TR there, profit is −(area pEBA) − TFC — a loss larger than TFC. Safe line: ‘producing at q₁ loses TFC plus the uncovered variable cost’.
The text refers to ‘sections 3.1–3.3’ and ‘section 3’; it means sections 4.3.1–4.3.3 of this chapter.

4. The firm's supply curve; shut-down and break-even

In simple wordsAsk a factory owner: ‘At ₹12 a unit, how much will you make? At ₹15? At ₹5?’ Her answers trace her marginal cost curve — until the price is so low that she wouldn't even cover wages and materials. Then her answer is ‘nothing’.

A firm's supply is the quantity it chooses to sell at a given price, technology and input prices given; the supply schedule and supply curve show it at each price. Short run: if p ≥ minimum AVC, the firm produces where p meets the rising SMC; if p < minimum AVC, it produces zero. So the short-run supply curve is the rising part of SMC from and above minimum AVC, with zero output at lower prices. Long run: the rising part of LRMC from and above minimum LRAC, zero below. The shut-down point is the last positive output as price falls: minimum AVC (where SMC cuts AVC) in the short run, minimum LRAC in the long run.

Normal profit is the minimum profit needed to keep a firm in business — an opportunity cost of entrepreneurship — and is counted as part of total cost; profit above it is supernormal. In the long run a firm will not stay with less than normal profit; in the short run it may. The break-even point is where the firm earns only normal profit: the minimum of average cost (SAC in the short run, LRAC in the long run), where the supply curve cuts it.

Short-run supply from illustrative cost curves: shut-down at min AVC, break-even at min SAC.

⤵ Deriving the short-run supply curve

Pick a price pthe firm takes it as given

Is p at or above min AVC?if not, supply is zero (shut down)

Find q where p = rising SMCthat is the quantity supplied

Repeat for every pricethe bold SMC segment above min AVC, plus zero below

Read the curvebetween min AVC and min SAC: loss but produce; above min SAC: supernormal profit

Reading Figures 4.7–4.10 and the ‘Opportunity cost’ box (pages 58–61)Fig. 4.7: at p₁ above min AVC the firm produces q₁; at p₂ below it, nothing. Fig. 4.8: the bold short-run supply curve (SMC above AVC). Fig. 4.9 and 4.10: the long-run equivalents with LRMC and LRAC. The box: ₹1,000 put into a family business instead of bank-1 (10%) or bank-2 (5%) has an opportunity cost equal to the interest forgone from bank-1, the best alternative — ₹100 for a year (our arithmetic). The point: supply curves are pieces of marginal cost curves, and ‘cost’ in economics includes forgone alternatives.

Beyond NCERT — the long-run industry

With free entry and exit, supernormal profits attract new firms and losses drive firms out, so in long-run industry equilibrium each firm earns only normal profit: p = minimum LRAC.
Accounting profit ignores the owner's opportunity costs; economic profit subtracts them — normal profit means zero economic profit.

Exam traps

Shut-down = min AVC (short run); break-even = min SAC/LRAC. Between them a firm produces at a loss in the short run.
Normal profit is included in cost.
Supply is the rising part of MC only, and only above min AVC.

5. What shifts a firm's supply: technology, input prices, a unit tax

In simple wordsA better machine lets a tailor make more shirts for the same cost, so at any price she offers more. A rise in electricity charges, or a tax on each shirt, does the opposite.

Since supply is part of the MC curve, anything that moves MC moves supply. Technological progress (NCERT's example: an organisational innovation) lets the same inputs produce more, lowering MC at every output: supply shifts right. A rise in an input price such as the wage raises average and (usually) marginal cost: supply shifts left. A unit tax of ₹t per unit (₹2 on 10 units = ₹20) raises LRMC and LRAC by t at every output (Fig. 4.11), so the long-run supply curve shifts left (Fig. 4.12).

An illustrative unit tax of ₹4: supply shifts up and to the left.

Reading the ‘Impact of a unit tax on supply’ box and Figures 4.11–4.12 (pages 62–63)Before the tax the firm has LRMC₀ and LRAC₀; after a tax of ₹t both shift up by t to LRMC₁ and LRAC₁ (Fig. 4.11); the long-run supply curve moves from S₀ to S₁ (Fig. 4.12). The point: a tax per unit is just another cost per unit.

Beyond NCERT — who pays a tax?Who finally bears a unit tax (its incidence) depends on the elasticities of demand and supply, not on who hands it to the government: the more inelastic side bears more. This links Chapter 2's elasticity to this chapter's supply shift and to Chapter 5's equilibrium.

Exam traps

Technology → supply right; input price ↑ or unit tax → supply left.
A change in the good's own price moves the firm along its supply curve.

6. Market supply

In simple wordsAt ₹20 a kilo, one farm sends 10 kg and another 5 kg to the market: market supply at ₹20 is 15 kg. Add every farm's offer at each price, and you have the market supply curve.

Market supply at a price is the sum of all firms' supplies at that price — a horizontal summation of supply curves. With two firms with different costs, below the lower shut-down price nobody supplies; between the two shut-down prices only the lower-cost firm supplies; above both, both do. The market curve is drawn for a fixed number of firms; more firms shift it right, fewer shift it left. NCERT's example: S₁(p) = p − 10 for p ≥ 10 (0 below), S₂(p) = p − 15 for p ≥ 15 (0 below), so S_m(p) = 0 for p < 10, p − 10 for 10 ≤ p < 15, and 2p − 25 for p ≥ 15 — we checked each piece.

NCERT's two supply curves and their horizontal sum, to scale.

Reading Figure 4.13 (page 64)Panel (a): firm 1's supply S₁; panel (b): firm 2's S₂ starting at a higher price; panel (c): the market curve S_m, equal to S₁ between the two shut-down prices and the sum above (at p₃, q₅ = q₃ + q₄). The point: the market curve is kinked where a new firm starts producing.

Exam traps

Add quantities at each price.
An increase in the number of firms shifts market supply right (Exercise 17).

7. Price elasticity of supply

In simple wordsIf the price of cricket balls triples and factories can quickly hire more stitchers, output jumps. If the price of mangoes triples in May, orchards can't grow more trees by June. Elasticity of supply measures how quickly and how much producers respond.

The price elasticity of supply e_S = (% change in quantity supplied) ÷ (% change in price) = (ΔQ/Q)/(ΔP/P). NCERT's example: cricket balls at ₹10, 200 produced; at ₹30, 1,000. Quantity rises (1000 − 200)/200 = 400%; price (30 − 10)/10 = 200%; e_S = 2. A vertical supply curve has e_S = 0; a rising one has e_S > 0; like demand elasticity, it is independent of units. Geometric method for a straight-line supply curve, at a point S with output q₀, e_S = Mq₀/Oq₀, where M is where the line (extended) meets the quantity axis: if it meets the price axis at a positive price (M on the negative side), e_S > 1; through the origin, e_S = 1; meeting the quantity axis at a positive quantity, e_S < 1 — at every point of each line.

Three straight supply lines through one point, computed.

Reading the cricket-ball example and Figure 4.14 (pages 65–66)The table gives old and new prices (₹10, ₹30) and quantities (200, 1,000); Fig. 4.14 shows three straight supply lines — meeting the price axis (e_S > 1), through the origin (= 1), meeting the quantity axis (< 1). The point: for straight supply lines the intercept decides elasticity. We checked: 400 ÷ 200 = 2.

Beyond NCERT — what makes supply elasticSupply is more elastic over longer periods (more inputs can vary — Chapter 3's long run), when spare capacity exists, when inputs are easy to hire, and when goods can be stored. Farm supply is often inelastic within a season, one reason farm prices swing sharply (Chapter 5).

Exam traps

Through the origin: e_S = 1 at every point, whatever the slope.
A vertical supply curve: e_S = 0. A horizontal one: e_S infinite (Beyond NCERT).
Unlike a straight demand line, a straight supply line through the origin has constant elasticity.

NCERT exercise — answer outlines

The chapter has no activities. Questions 1–18 are conceptual; 19–27 numerical — every answer recomputed. Try first, then open.

1. Characteristics of a perfectly competitive market.

Many buyers and sellers; homogeneous product; free entry and exit; perfect information — resulting in price-taking behaviour by firms and buyers.

2–6. How are TR, price and quantity related? What is the price line? Why is the TR curve a straight line through the origin? How are price, AR and MR related?

TR = p × q. Price line: horizontal at p — the firm's AR and MR curve and its perfectly elastic demand curve. TR is a straight line because p is constant, with slope p, and passes through the origin because zero output earns zero. AR = TR/q = p; MR = ΔTR/Δq = p.

7. Conditions for a profit-maximising competitive firm producing positive output.

(i) p = MC; (ii) MC non-decreasing at that output; (iii) p ≥ AVC (short run), p ≥ AC (long run).

8. Can a profit-maximising firm produce positive output where price ≠ MC?

No (with continuous output). If p > MC, one more unit adds to profit; if p < MC, one unit less adds to profit. With whole units only, the firm produces the last unit whose MC ≤ p (Exercise 21: q = 5, MC 7 < 10 < next MC 11).

9. Will it ever produce where MC is falling?

No: where p = MC on a falling MC, MC exceeds p just below that output, so producing less raises profit (Exercise 21: q = 1 gives −5).

10–11. Positive output if price < minimum AVC (short run)? If price < minimum AC (long run)?

Short run: no — revenue would not cover even variable cost, so the loss would exceed TFC; producing zero loses just TFC. Long run: no — it would make a loss, while exiting gives zero.

12–13. Supply curve of a firm in the short run and the long run.

Short run: rising part of SMC from and above minimum AVC; zero below. Long run: rising part of LRMC from and above minimum LRAC; zero below.

14–17. Effects of technological progress, a unit tax, a rise in an input price, and more firms.

Technology lowers MC: supply shifts right. A unit tax raises MC and AC by t: supply shifts left. A higher input price raises MC: supply shifts left. More firms: market supply shifts right.

18. What is price elasticity of supply and how is it measured?

Responsiveness of quantity supplied to price: %ΔQ ÷ %ΔP; for a straight line, Mq₀/Oq₀ (geometric). Cricket balls: 400% ÷ 200% = 2.

19. Price ₹10: compute TR, MR and AR for 0–6 units.

TR: 0, 10, 20, 30, 40, 50, 60. MR: 10 at every unit. AR: 10 at every positive output.

20. TR: 0, 5, 10, 15, 20, 25, 30, 35 and TC: 5, 7, 10, 12, 15, 23, 33, 40 for q = 0…7. Profit at each output and the market price?

Profit: −5, −2, 0, 3, 5, 2, −3, −5. Market price = TR/q = ₹5. Maximum profit ₹5 at q = 4.

21. TC for q = 0…10: 5, 15, 22, 27, 31, 38, 49, 63, 81, 101, 123; price ₹10. Profit at each output and the profit-maximising output?

Profit: −5, −5, −2, 3, 9, 12, 11, 7, −1, −11, −23. Profit-maximising output q = 5 (MC of the 5th unit 7 ≤ 10; of the 6th 11 > 10).

22. Two firms; prices 0–6; SS₁ = 0, 0, 0, 1, 2, 3, 4 and SS₂ = 0, 0, 0, 1, 2, 3, 4. Market supply?

0, 0, 0, 2, 4, 6, 8.

23. Two firms; prices 0–8; SS₁ = 0, 0, 0, 1, 2, 3, 4, 5, 6 and SS₂ = 0, 0, 0, 0, 0.5, 1, 1.5, 2, 2.5. Market supply?

0, 0, 0, 1, 2.5, 4, 5.5, 7, 8.5.

24. Three identical firms; firm 1's supply at prices 0–8: 0, 0, 2, 4, 6, 8, 10, 12, 14. Market supply?

Three times each: 0, 0, 6, 12, 18, 24, 30, 36, 42.

25. Revenue ₹50 at price ₹10; revenue ₹150 at price ₹15. Price elasticity of supply?

Quantities: 50/10 = 5 and 150/15 = 10. %Δq = 100%; %Δp = 50%. e_S = 2.

26. Price ₹5 → ₹20; quantity rises by 15 units; e = 0.5. Initial and final output?

%Δp = 300%; %Δq = 0.5 × 300 = 150%, so 15 = 1.5 × q₀: q₀ = 10, q₁ = 25.

27. At ₹10 a firm supplies 4 units; price rises to ₹30; e = 1.25. New quantity?

%Δp = 200%; %Δq = 1.25 × 200 = 250%: Δq = 2.5 × 4 = 10, so q₁ = 14.

⤵ Answer frame for firm and supply numericals

RevenueTR = p × q; AR = MR = p

CostsTFC = TC at zero output; MC, AVC, SAC from the TC column

Outputlast unit with MC ≤ p on rising MC; check p ≥ AVC

ProfitTR − TC, or (p − SAC) × q

Supply and elasticitysum firms horizontally; eₛ = %Δq ÷ %Δp

What to remember

Numbers

Features of perfect competition4 — many firms, homogeneous product, free entry/exit, perfect information

Table 4.1 (₹10 a box)TR 0, 10, 20, 30, 40, 50

NCERT's MR example(30 − 20)/(3 − 2) = 10 = p

Profit-maximising conditions3 — p = MC; MC not falling; p ≥ AVC (SR) / AC (LR)

Exercise 21 MC10, 7, 5, 4, 7, 11, 14, 18, 20, 22

Exercise 21 profitmax ₹12 at q = 5

Exercise 21 shut-down / break-evenmin AVC ₹6.5 (q = 4) / min SAC ₹7.6 (q = 5)

Opportunity-cost box₹1,000; bank-1 10%, bank-2 5% → cost = bank-1 interest (₹100 a year)

Unit-tax example₹2 × 10 units = ₹20

Market supply example0 (p < 10); p − 10 (10 ≤ p < 15); 2p − 25 (p ≥ 15)

Cricket balls₹10 → ₹30, 200 → 1,000: eₛ = 400/200 = 2

Exercises 25 / 26 / 27eₛ = 2 / 10 → 25 / 14

Robinson, Chamberlin †1933

Competition Act / MRTP Act †2002 / 1969

One-liners

Many firms, identical goods, free entry, full information → price takers.
For a price taker, AR = MR = p, and the firm's demand curve is flat.
Produce where p = MC on the rising part of MC.
Short run: stay open if price covers AVC; long run: only if it covers AC.
Short-run supply = SMC above min AVC.
Shut-down at min AVC; break-even at min AC.
Normal profit is a cost; supernormal profit is above it.
Technology shifts supply right; input prices and unit taxes shift it left.
Market supply is the horizontal sum.
A straight supply line through the origin has elasticity 1 everywhere.

Traps to avoid

Shut-down point = min AVC, not min SAC; break-even = min SAC (LRAC in the long run).
p = MC on a falling MC is not a profit maximum.
The firm's demand curve is horizontal; the market demand curve slopes down.
Normal profit is included in total cost.
NCERT writes condition 3 as p > AVC in one place and p ≥ AVC elsewhere — use ≥.
Fig. 4.4's loss is −(area pEBA) − TFC, not ‘(area EBAp) − TFC’.
NCERT's ‘section 3’ cross-references mean section 4.3 of this chapter.
A unit tax shifts supply left (MC up by t).
Supply through the origin: eₛ = 1; meets price axis: > 1; meets quantity axis: < 1.

How to strategise

Prelims — what UPSC asks

No past question has its core in this chapter. Prepare for statement questions on: features of perfect competition; AR = MR = p; shut-down vs break-even; normal profit; what shifts supply (technology, input prices, taxes); elasticity of straight-line supply curves.
Market-form questions (monopoly, oligopoly) belonged to a chapter no longer in the NCERT book — know the basic definitions from the perfect-competition benchmark.

Mains — where it appears and how to answer

Use in GS3 answers: why farmers are price takers in competitive mandis and need price support or market reform; how a per-unit tax or input-price change (fuel, fertiliser) shifts supply; why supply of farm goods is inelastic in the short run; the role of competition policy (CCI).
Set views side by side — perfect competition as an efficient benchmark (Walras; Arrow–Debreu) versus critiques (Robinson, Chamberlin, Hayek) — without present-day political commentary.

Self-check

Tap an option. NCERT's own exercise questions come first; the rest test the figures and common confusions.

1. Which is NOT a defining feature of perfect competition in NCERT?

2. For a firm under perfect competition:

3. In Exercise 21 (price ₹10), MC equals the price at q = 1, yet the firm does not produce 1 unit because:

4. A firm's short-run shut-down point is at:

5. A unit tax on a good shifts a firm's supply curve:

6. Firm 1 supplies p − 10 (p ≥ 10) and firm 2 supplies p − 15 (p ≥ 15). Market supply at p = 20 is:

7. A straight-line supply curve through the origin has price elasticity:

UPSC questions from this chapter

Open any question to attempt it in the Question bank — your attempt is saved to your progress.

Prelims

0 questions · newest first

Mains

0 questions

0 Prelims and 0 Mains UPSC questions are linked to this chapter. More from Introductory Microeconomics.