CBSE Class 12 Microeconomics NCERT Solutions: Chapter 4 - Theory of the Firm Under Perfect Competition

Solution: A perfectly competitive market is a theoretical market structure characterized by several key features that ensure intense competition and a specific market outcome. These characteristics are:

1. Large Number of Buyers and Sellers: There are numerous buyers and sellers in the market, so many that no single buyer or seller can influence the market price. Each participant is a tiny fraction of the total market.
2. Homogeneous Product: All firms sell identical products. These products are perfect substitutes for one another in terms of quality, features, and appearance. This means buyers are indifferent as to which seller they purchase from.
3. Free Entry and Exit: New firms can enter the market easily, and existing firms can leave the market without facing significant barriers. This ensures that in the long run, firms earn only normal profits.
4. Perfect Knowledge: Both buyers and sellers have complete and perfect information about the prices, quality of goods, and the sources of supply. This prevents any seller from charging a higher price and ensures that all buyers are aware of the prevailing market price.
5. Perfect Mobility of Factors of Production: Factors of production (like labor and capital) are free to move between different industries and locations. This ensures that factors are employed where they are most productive and earn their opportunity cost.
6. No Promotional and Selling Costs: Since the products are homogeneous and buyers have perfect knowledge, firms do not need to incur expenses on advertising, sales promotion, or other selling activities.
7. Cheap and Efficient Transport and Communication: For a uniform market price to prevail, it's essential that goods can be transported quickly and cheaply, and information about price changes can spread rapidly.
8. Wide Extent: The market for the product is widespread, often national or even international, with a stable and universal demand for the commodity.

These conditions collectively lead to a situation where individual firms are 'price takers', meaning they must accept the market-determined price.

Solution: The total revenue (TR) of a firm is the total income it generates from selling a certain quantity of its product. It is directly related to the market price (P) of the product and the quantity (Q) of the product sold by the firm. The relationship can be expressed as:

Total Revenue = Market Price × Quantity Sold

Mathematically, this is represented as:

$$TR\; =\; P\; \backslash times\; Q$$

In a perfectly competitive market, the market price (P) is determined by the forces of market demand and supply, and each individual firm is a price taker. This means the firm cannot influence the market price. Therefore, the firm can only change its total revenue by altering the quantity of the product it sells. If the firm sells more units at the given market price, its total revenue will increase proportionally. Conversely, if it sells fewer units, its total revenue will decrease.