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The Theory of the Firm under Perfect Competition

MARKET-STRUCTURE 
Per%ct 
C«rvetitm 
12. Producer Equilibrium or Profit Maximisation A producer is said to be in 
equilibrium, when he maximises his profits or minimises his losses. 
20. Elasticity of Supply it can be defined as a measure of the degree of 
responsiveness of quantity supplied to changes in the commodity's own prices. 
21. Measurement of Elasticity of Supply Percentage method E =% Change in 
quantity supplied / % Change in price or AQ/L\P = P/Q
22. Tvvo Extreme Cases of Elasticity of Supply 
(i) Perfect elastic supply (es= co) 
(i i) Perfect inelastic supply (es = O) 
Equilibrium Price: The price at which the quantity demanded and supplied are equal is 
known as equilibrium price. 
Equilibrium quantity: The quantity demanded and supplied at an equilibrium price is 
known as equilibrium quantity. 
Market equilibrium is a state in which market demand is equal to market supply. 
There is no excess demand and excess Simly in the market 
price P 
s 
Equilibnum Price 
Excess 
s 
E Equilibrium pent 
Deriand O 
q 
Quantity
Maximum Price Ceiling: It means the maximtun price the sellers are allowed to charge less than 
equilibrium market price. Government imposes such a ceiling when it finds that the 
demand for necessary goods exceeds its supply. That is, when consumers are facing 
shortages and equilibrium price is too high. Government does it in the interest of 
consumers. Excess demand may be fulfilled by: 
(a) Rationing 
(b) Dual marketing 
8 
S 
o 
Excess Supply S 
Minimum Support Price 
Equilibrium Price 
Maximum Price ceiling 
Excess mand D 
Quantity

Minimum Price Ceiling: It means that producer are not allowed to sell, the goods below the price fixed by Government, When government finds that equilibrium price is too low for the produce, then Govt. fixes a price ceiling higher than equilibrium price to prevent the possible loss to the producers. The price is also called floor price or minimum support price. Generally, government buys the excess supply at this price. 

Technological Progress on Supply Curve:- 

Technological progress reduces the marginal cost of production. Producers can produce comparatively more goods and services with the help of available factors of production. This situation is likely to shift the supply curve rightward.  

There is a positive relationship between technological progress and supply. Technological progress often leads to a decline in the cost of production which enables producers to produce and supply more goods and services at the existing price. 

Thus, technological progress is likely to increase supply causing a rightward shift in the supply curve.  

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