Distinguish between a firm and an industry. Explain the equilibrium of a firm and industry under perfect competition.
Answer:
A business firm is an economic unit. It is also called as a production unit. Production is one of the most important activities of a firm in the circle of economic activity. The main objective of production is to satisfy the demand for different kinds of goods and services of the community.
Difference between Firm and Industry
A firm is a single manufacturing unit producing and selling either a commodity or service. It is a part of the industry. It is called as a business enterprise. Business is an economic activity and a business unit is an economic unit. It is an individual producing unit. It converts inputs into outputs. These production units are organized and run by the people either as individuals or as members of households or as a group of people. It is basically an "this site"income-generating unit. It buys inputs like raw materials, labor, capital, power, fuel etc and produce goods and services for sale to consumers. It organizes and combines all kinds of resources and plan for the use of these resources in the best possible manner.
Profit making is the basic objective of a firm. The traditional and conventional objective of a firm was profit maximization and now profit optimization has become the main objective.
A business firm is a legal entity on the basis of ownership and contractual relationship organized for production and sale of goods and services. Many firms producing similar or homogeneous goods or services collectively make an industry. The term industry refers to a set or group of firms engaged in the production of a particular product or a service. For example, Tata textile mills, Binny mills, Digjam, Bhilwara, Vimal, Raymond’s etc are firms producing textile cloth. All of them put together constitute the textile industry in India. Thus, an industry is engaged in the production of homogeneous goods that are substitutes for each other, use common raw materials, have similar processes, etc. All firms engaged in providing the same kind of services or doing a common trade or business constitutes an industry. For example, banks, hotels etc.
An industry is a particular line of productive activity in which many firms are engaged each adopting its own production and pricing policies to its best advantage.
Profit making is the basic objective of a firm. The traditional and conventional objective of a firm was profit maximization and now profit optimization has become the main objective.
A business firm is a legal entity on the basis of ownership and contractual relationship organized for production and sale of goods and services. Many firms producing similar or homogeneous goods or services collectively make an industry. The term industry refers to a set or group of firms engaged in the production of a particular product or a service. For example, Tata textile mills, Binny mills, Digjam, Bhilwara, Vimal, Raymond’s etc are firms producing textile cloth. All of them put together constitute the textile industry in India. Thus, an industry is engaged in the production of homogeneous goods that are substitutes for each other, use common raw materials, have similar processes, etc. All firms engaged in providing the same kind of services or doing a common trade or business constitutes an industry. For example, banks, hotels etc.
An industry is a particular line of productive activity in which many firms are engaged each adopting its own production and pricing policies to its best advantage.
Equilibrium of the Industry and Firm under Perfect Competition
1. Equilibrium of the Industry in the short run
The term ‘Equilibrium’ in physical science implies a state of balance or rest. In economics, it refers to a position or situation from which there is no incentive to change. At the equilibrium point, an economic unit is maximizing its benefits or advantages. Hence, always there will be a tendency on the part of each economic unit to move towards the equilibrium condition. Reaching the position of equilibrium is a basic objective of all firms.
In the short period, time available is too short and hence all types of adjustments in the production process are impossible. As plant capacity is fixed, output can be increased only by intensive utilization of existing plants and machineries or by having more shifts. Fixed factors remain the same and only variable factors can be changed to expand output. Total number of firms remains the same in the short period. Hence, total supply of the product can be adjusted to demand only to a limited extent.
In the short run, price is determined in the industry through the interaction of the forces of demand and supply. This price is given to the firm. Hence, the firm is a price taker and not price maker. On the basis of this price, a firm adjusts its output depending on the cost conditions.
In the short period, time available is too short and hence all types of adjustments in the production process are impossible. As plant capacity is fixed, output can be increased only by intensive utilization of existing plants and machineries or by having more shifts. Fixed factors remain the same and only variable factors can be changed to expand output. Total number of firms remains the same in the short period. Hence, total supply of the product can be adjusted to demand only to a limited extent.
In the short run, price is determined in the industry through the interaction of the forces of demand and supply. This price is given to the firm. Hence, the firm is a price taker and not price maker. On the basis of this price, a firm adjusts its output depending on the cost conditions.
An industry under perfect competition in the short run, reaches the position of equilibrium when the following conditions are fulfilled:
1. There is no scope for either expansion or contraction of the output in the entire industry. This is possible when all firms in the industry are producing an equilibrium level of output at which MR = MC. In brief, the total output remains constant in the short run at the equilibrium point.
Thus a firm in the short run has only temporary equilibrium.
2. There is no scope for the new firms to enter the industry or existing firms to leave the industry.
3. Short run demand should be equal to short run supply. The price so determined is called as ‘subnormal price’. Normal price is determined only in the long run. Hence, short run price is not a stable price.
1. There is no scope for either expansion or contraction of the output in the entire industry. This is possible when all firms in the industry are producing an equilibrium level of output at which MR = MC. In brief, the total output remains constant in the short run at the equilibrium point.
Thus a firm in the short run has only temporary equilibrium.
2. There is no scope for the new firms to enter the industry or existing firms to leave the industry.
3. Short run demand should be equal to short run supply. The price so determined is called as ‘subnormal price’. Normal price is determined only in the long run. Hence, short run price is not a stable price.
No comments:
Post a Comment