CBSE Class 12 Micro Economics Revision Notes Chapter 4

Class 12 Microeconomics Chapter 4 Notes – The Theory Of The Firm Under Perfect Competition

The students can refer to the latest Class 12 Microeconomics Chapter 4 Notes on the Extramarks website. The notes are made as per the latest CBSE 2022-2023 syllabus. Further, these notes will help the students to learn about the topics discussed during the class. They are well explained and easy to understand. Furthermore, they will help the students to make their foundation strong for the concepts and topics. Thus, students can refer to Class 12 Microeconomics Chapter 4 Notes to score better in the exam. 

Class 12 Microeconomics Chapter 4 Notes The Theory Of The Firm Under Perfect Competition consists of essential concepts and theories. It deals with how a firm can decide how much to produce. Further, it is the unreasonable assumptions about firm behaviour that must be maintained. The students will study various aspects of how much a firm should produce, factors to maximise profits in the market, market structure that leads to perfect competition, etc. Furthermore, they will also understand how to summarise the output levels that a firm chooses to produce for different market price values. 

By studying from the class 12 Microeconomics notes, chapter 4, the students will have a thorough understanding of the subject matter, and will be able to perform in the exam efficiently. The revision notes are prepared such that they are easy to read and include core concepts clearly described in a short manner. With the help of these notes, the students can confidently attempt both objective and subjective types of questions in the board exam. 

Stay tuned to the Extramarks website for the latest updates and notifications regarding the Microeconomics chapter 4 class 12 notes. Further, the students can also refer to the CBSE syllabus and NCERT books.

Key Topics Covered In Class 12 Microeconomics Chapter 4 Notes

The following are the key topics covered under Extramarks’ Class 12 Microeconomics Chapter 4 Notes. 

Market: 

It is a method or arrangement that connects both sellers and buyers of a particular product or service, allowing them to complete the task of buying and selling the item or service at prices that are mutually agreed upon.

Perfect competition: 

It is a type of market that sees a wide range of sellers and buyers who have to compete for the same product at the same cost, and with companies allowed to move into and out without government oversight.

Since price remains constant even in perfect competition, the average and marginal revenue curves will be in alignment, i.e., they become parallel and equal with respect to the x-axis. The industry determines the price in perfect competition with the market forces, both supply and demand. 

A single company does not influence the price of a product and the cost. A business can only make decisions regarding output. Therefore the industry decides the prices, and the company accepts the price.

Features of Perfect Competition: 

This section of the Class 12 Microeconomics Chapter 4 Notes covers the features of perfect competition as included below.

A large number of sellers: In a highly competitive marketplace, there are a huge number of small-scale sellers who sell identical products to their customers. The quantity of sellers is large enough that no one firm can alter the overall price or supply of the market. Therefore, no single seller changing its supply or sale could affect the prevailing market price or market supply.

Homogeneous Products: Each firm produces and markets a uniform product. i.e. the product of one company’s development cannot be distinguished from another company.

Price-Taker: In this kind of a market, the company is a price taker and is not a price maker since the percentage of every firm on the market is too tiny to have an impact on the cost of the product. The firms are free to leave or enter at any point.

Free exit: Freedom of exit implies that there aren’t any obstacles to stop current firms from withdrawing from the marketplace. Companies attempt to exit because they are facing losses. When firms begin to leave, the market supply is reduced, which leads to an increase in price, and in turn, reduces loss. The companies do not cease to leave until losses are gone, and the remaining company will be making only normal earnings.

Complete knowledge of markets: This implies that producers and consumers have all the necessary market-related information. Producers cannot sell their products at any cost lower than the market price, and consumers won’t be willing to purchase at any higher price than the current market price. This will eliminate the price disparities in the market and aid in achieving the equilibrium price quickly.

Free entry: There is no barrier to the entrance of brand new businesses into the market. If the established companies earn excessive profits and the profit influences the new companies, they join the business. This boosts market supply and results in a drop in the market price and profit.

Perfect mobility: in a competitive market, the products’ elements are extremely mobile and can easily be transferred from one company to another.

Price Line In Perfect Competition: 

Under this section of Class 12 Microeconomics Chapter 4 Notes, students will learn about price line in perfect competition. The price line and the demand curve of a single company in a competitive high market are identical. The bar signifies that the current price offers the goods or services.

Price lines in a market are straight horizontal lines that indicate that the firm can offer any quantity of a product but only at a specific price. If the company attempts to increase the price, the total demand will decrease to zero because there are numerous small businesses, and none can alter the price or supply.

Revenue

It is the money earned from a business by selling a particular product (or service) to customers.

Total Revenue (TR): The cost (p) for the item is multiplied by the amount of the product and its sales to determine the revenue (q).

The term “total revenue” (TR) refers to

TR=pxqTR=pxq in algebraic form.

Total Revenue Curve: The relation between the amount of revenue generated by a company to sell its products and the amount of its output sold is illustrated by a graph. It is then compared with the firm’s total cost curve to establish economic profit and the production level that maximises profit.

Average Revenue: The amount of money made per unit output is a middle income in the sense of the seller’s cash for every unit of the product sold. The average pay is determined by dividing total revenues by output.

Marginal Revenue: Marginal revenue is the money earned from selling an additional unit of a particular commodity. If another team of products is bought on the open market, it increases revenue.

Profit: The difference between the expense and revenue is profit. Profit is calculated by:

Profit = Revenue – Cost

Break-Even Point: If a business reaches the break-even point, it has covered the entire cost of manufacturing. In this way, the break-even point can be defined as a situation in which TR-TC or ARAC are equivalent. In this instance, the business only earns normal profits.

Shutdown Point: A business’s variable costs are not adequately covered, increasing fixed production costs. In this way, a shutdown point can be defined as the time when TR = TVC or AR= AVC.

Profit Maximisation or Profit equilibrium If a business owner maximises profits or minimises losses, the producer is believed to be in equilibrium. Profit maximisation condition:

• MR Equals MC. 
• MC is rising; MC may be rising, or MC should be removed MR by removing it from beneath.

Supply

The quantity of a commodity that companies are able and willing to sell on the market over a specific time and at a particular price is called supply. Students will learn more about supply under Class 12 Microeconomics Chapter 4 Notes.

Supply Schedule: Supply schedules list the number of products that a business can sell at different prices while ensuring that the prices of technology and factors remain in check.

Supply Curve: A supply curve for a company shows the output the company decides to produce according to changing prices while keeping the technology and factor price constant.

Short-run Supply Curve of a Firm: A supply curve for a business tells us the amount of a product profit-maximising company will produce at every price point.

• Case No. 1: Price is greater than or equal to the minimum AVC: Let’s suppose that the market value is P1 and is more than that of the minimal AVC. We first equalise P1 with SMC on the growing portion of the SMC curve, resulting in Q1, the output degree. It is essential to note that AVC in Q1 does not exceed the cost of market P1.

Therefore, in Q1, the three requirements listed in section 3 must be fulfilled. In the short term, the output degree of the company is the same as Q1 when the cost of production is P1.

• Case No. 2: Price is less than the minimum AVC: Assume that the market price of P2 is less than the AVC minimum. If a profit-maximising company achieves a positive output in the short-term, the value of the market price called P2 must be greater than or greater than AVC at the output amount. AVC’s outperforms P2 when compared to the image.

To put it another way, the business cannot earn profits. In the end, if the market price equals P2, the company cannot produce output.

Long-run Supply Curve of a firm: Under this section of Class 12 Microeconomics Chapter 4 Notes, students get a brief of long-run supply curve of a firm. If all inputs are variable, the long-term supply refers to the number of available commodities. The long-run average cost curve is part of the average short-run cost curve. With the addition of growing marginal cost curves for the long run, the supply curve is upwardly sloped.

• Case No. 1: Price greater than or equal to the minimum LRAC: Let us assume that the market value is P1, higher than the minimal LRAC. We can calculate the output degree Q1 by comparing P1 to LRMC in the increasing portion of the LRMC curve. It is also important to note that LRAC in Q1 doesn’t over the market cost price, P1. In the end, in Q1, there are three requirements fulfilled. If the market price exceeds the P1 price, the company’s inventory is the same as Q1 in the long term.
• Case No. 2: Price less than the minimum LRAC: Assuming that the market cost rate is P2, this is less than the LRAC minimum. Suppose a profit-maximising business has a higher output over time. The production costs, called P2, must be higher than or greater than LRAC at production time. It means the company is unable to generate a positive result. Therefore, when the cost at a market price of P2 is zero, the company cannot produce any results. This is a crucial conclusion when we combine cases one and two.

A long-run curve for a company’s supply is the growing section of the LRMC curve starting at and over the minimum LRAC, and the zero production curve for any cost less than the minimal LRAC.

Determinants of Supply Curve: Under this section of Class 12 Microeconomics Chapter 4 Notes, students learn about the determinants of the supply curve. The determinants of a sully curve include the following:

• Cost of production: Profit maximisation is the principal goal of many private companies. Production costs reduce profit which limits the supply. Prices for inputs, salaries, taxes and regulations from the government, etc., are all elements that affect the cost of production.
• Technology: Technological advances assist in reducing costs of production and increasing profits, which results in greater availability.
• The number of vendors: Market supply increases because more sellers enter the market.
• Price expectations for the future: If the producers anticipate higher future expenses, they’ll be inclined to hold onto their stocks and then sell them later to make money from the higher cost.

Market Supply Curve: The market supply bend links the total output and the usual cost of production for this output. The market supply curve shows how the total quantity of output varies as the cost of production changes. If the curve is downward sloping, meaning that a higher production cost will lead to a lower quantity of output. Further, the bend links the total output and the usual cost of production for this output.

Price Elasticity of Supply: Price elasticity is an indicator of how sensitive a quantity of a good is to changes in price.

Extreme Cases of Price Elasticity of Supply

Perfect elastic supply of (es=∞): The most extreme instance with perfect elasticity is where the sought-after amount (Qd) and the supply quantity (Qs) are altered by an amount as a result of any price change. The demand and supply curves are both horizontal in both instances.

Perfect inelasticity supply (es=0): If a specific amount of a service or product can be provided at any cost, it is an inelastic supply. The supply elasticity for such a commodity or service is zero. Straight lines parallel to the Y-axis represent an inelastic supply curve. This shows how supply stays the same regardless of price.

Equilibrium Price: It is when the commodities’ supply is equal to the demand. If a significant index goes through the process of sideways or consolidation and the forces of demand and supply are thought to be equal, it is believed to be in the state of equilibrium.

Equilibrium Quantity: If demand and supply meet, the quantity of an item that consumers are looking to purchase equals the amount of product the producers would like to create.

Application of Demand Supply

Maximum Price Ceiling: This refers to the lowest price that sellers can charge in relation to the market equilibrium price. If the demand for essential goods exceeds the available quantity, the government will impose a ceiling.

This is the case when there is a shortage among buyers and when the equilibrium price is too high. The government usually does it for the betterment of the consumers. Rationing and dual marketing can be employed to satisfy the demand for goods and services.

Minimum Price Ceiling: The result is those producers are not permitted to sell their products below the price set in the hands of the government. If the government thinks it is high for the product, it establishes a price threshold greater than the equilibrium value to safeguard producers from possible losses.

The price is also referred to as the minimal support cost or “the floor” price. Most of the time, the government buys the extra supplies at this expense.

Technological Advancement on Supply Curve: 

• The cost of production decreases because of technological advancements. With the help of readily accessible factors of production, manufacturers can produce significantly more goods and services.
• Supply curves are expected to move rightward, while the marginal cost curves are expected to move downward.
• In the end, technological advances will increase supply, causing the supply curve to change towards the right.

Sub-topics in Class 12 Microeconomics Chapter 4 Notes

• Perfect competition and revenue: A firm’s earnings and income are discussed. The firm earns revenue by selling the goods it produces in the market. 
• Price Elasticity of Supply: It is a subtopic that measures the responsiveness of quantity supplied and the changes in the price of the goods. 
• Profit Maximisation: It includes different concepts such as the firm’s total revenue and its total cost of production.
• Determinants of a firm’s supply curve: The curve refers to the factors that affect a firm’s marginal cost curve. Further, the curve shows the aggregate output that the market produces. 
• Supply Curve of a firm: The supply curve explains the firm’s output level corresponding to different values. 

Kinds of Elasticities of Supply

There are five types of price elasticities in supply:

1. Perfectly elastic supply: A commodity has a perfectly elastic supply when it has an infinite supply at a given price. Even a slight shift in price brings down the supply to zero.
2. Less elastic supply: With a lower price change percentage, the percentage change is less in quantity than in price.
3. Unitary elastic supply is elastic supply in a given commodity if the percentage change of quantity supplied equals the percentage change of price.
4. Perfectly inelastic supply: No price change can affect a perfectly elastic supply.
5. High elastic supply: The supply is considered highly elastic if the price change is less than the percentage change of the quantity.

Class 12 Microeconomics Chapter 4 Notes Exercises & Answer Solutions

The students can refer to Class 12 Microeconomics Chapter 4 Notes and exercises and solutions. It is made available on the Extramarks website for students to refer and score better in the board exams. The solutions play a vital role in exam preparation. The students can grasp the concept and topics in the chapter, the characteristics of a perfectly competitive market and how to calculate the total revenue, the market price and its quantity. 

The subject matter expert crafts the solutions. The solutions have been explained in detail and cover all the essential aspects of the latest syllabus. The terms are described in detail such that it helps the students understand the depth of the theories and formulas. Further, it also includes solutions for profit maximisation and the price elasticity of supply. Thus, to score more in the exam, the student can refer to Class 12 Microeconomics Chapter 4 notes.

The Class 12 Microeconomics Chapter 4 notes cover essential topics that help students solve the sums and MCQs. It helps develop problem-solving abilities, and they can efficiently perform in higher-order thinking skills questions. Further, it also contains well-structured solutions and different types of practice problems. There are in-depth explanations of the core concepts. 

They will help improve the overall learning and help students better understand the chapter. The students will have no doubts and clearly understand the supply curve and profit maximisation. Students can visit our website Extramarks to access various other study materials, CBSE sample papers and CBSE revision notes. 

Key Features of NCERT Solutions Class 12 Microeconomics Chapter 4 Notes 

The NCERT Solutions Class 12 Microeconomics chapter 4 notes contain conceptual sums covering CBSE board exams and competitive exams. It is designed especially for competitive exams. Further, it will carry MCQs, new concepts and skill development questions. It helps the students generalise the pictures and exposes them to multiple concept-based questions.  

The key features of Extramarks class 12 microeconomics chapter 4 notes include the following:

• The revision notes are easy to understand and briefly describe complex concepts. 
• The Class 12 Microeconomics Chapter 4 Notes is the right guide for a learner who wants to understand the core concepts of Economics thoroughly. There are many interconnected topics and theories within Economics, and studying from reliable sources will highly benefit the students to gain deeper understanding and love for the subject.
• The Class 12 Microeconomics Chapter 4 notes include topics, brief descriptions, notes, formulas and problems.
• The students will understand how to calculate the price elasticity of a firm’s supply and supply curve. 
• Some of the essential topics include determinants of a firm’s supply and perfect competition and revenue. 
• The Class 12 Microeconomics Chapter 4 notes are prepared, with each chapter explained concisely from the latest edition of the NCERT book. 
• The revision notes play a vital role in helping the students to understand complex theories concisely. 

Class 12 Microeconomics Chapter 4 notes are available for the students; they can also refer to it to perform better in the board exams and pursue higher studies in this subject. Thus, to strengthen their knowledge, the students can start their preparation from NCERT Solutions Class 12.