NCERT Solutions for Class 12 Economics Chapter 4: The Theory of the Firm under Perfect Competition (NCERT 2026–27)

These Class 12 Economics Chapter 4 solutions cover The Theory of the Firm under Perfect Competition from the NCERT book Introductory Microeconomics, updated for the 2026–27 session. The chapter studies how a price-taking, profit-maximising firm decides how much to produce, how its revenue (TR, AR, MR) behaves, the three conditions for profit maximisation, how the short-run and long-run supply curves are derived, the market supply curve, and the price elasticity of supply. Below you get every NCERT exercise question reproduced verbatim and solved step by step — including all numerical problems with full working — plus key formulas, extra practice, MCQs, Assertion–Reason and FAQs.

Class: 12 Subject: Economics Book: Introductory Microeconomics Chapter: 4 Topic: The Theory of the Firm under Perfect Competition Session: 2026–27
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Class 12 Economics Chapter 4 – Overview

This chapter answers a single question: how does a firm decide how much to produce? The answer rests on the assumption that a firm is a ruthless profit maximiser, operating in a market called perfect competition — a market with many buyers and sellers, a homogeneous product, free entry and exit, and perfect information. The defining outcome of these features is price-taking behaviour: each firm takes the market price as given. For such a firm, total revenue is TR = p × q, and both average revenue and marginal revenue equal the market price (AR = MR = p), so the demand curve facing the firm is a horizontal price line (perfectly elastic). Profit is π = TR − TC, and it is maximised where p = MC, MC is non-decreasing, and price covers AVC in the short run (AC in the long run). Applying these conditions, the firm’s supply curve is the rising part of the marginal cost curve from and above the minimum AVC (short run) or minimum LRAC (long run), with zero output below it. Horizontally summing individual supply curves gives the market supply curve. Finally, the chapter measures how responsive quantity supplied is to price through the price elasticity of supply.

Key Concepts & Terms

Perfect competition: a market with a large number of buyers and sellers, a homogeneous product, free entry and exit, and perfect information — resulting in price-taking behaviour.

Price-taking firm: a firm so small relative to the market that it cannot influence the price; it sells any quantity it wants at the going market price but nothing at a higher price.

Total Revenue (TR): market price multiplied by output, TR = p × q. The TR curve is an upward-sloping straight line through the origin (since p is constant).

Average Revenue (AR): revenue per unit of output, AR = TR/q = p. For a price-taker, AR equals the market price, so the AR curve is the horizontal price line — also the firm’s demand curve.

Marginal Revenue (MR): the addition to total revenue from selling one more unit, MR = ΔTR/Δq. For a price-taker, MR = AR = p.

Profit (π): the difference between total revenue and total cost, π = TR − TC.

Profit-maximising conditions: (1) p = MC; (2) MC is non-decreasing (rising) at that output; (3) the firm produces only if p ≥ AVC in the short run, and p ≥ AC in the long run.

Supply curve of a firm: short run — the rising part of the SMC curve from and above minimum AVC, plus zero output for prices below minimum AVC; long run — the rising part of the LRMC curve from and above minimum LRAC.

Shut-down point: the minimum AVC point (where SMC cuts AVC) in the short run; the minimum LRAC point in the long run. Below it the firm produces nothing.

Normal profit & break-even point: normal profit is the minimum profit needed to keep the firm in business (part of total cost). The break-even point, where the firm earns only normal profit, is the minimum-AC point where the supply curve cuts the SAC (short run) or LRAC (long run) curve.

Market supply curve: obtained by the horizontal summation of the supply curves of all individual firms; it shifts right (left) as the number of firms rises (falls).

Price elasticity of supply (eS): the responsiveness of quantity supplied to a change in price — percentage change in quantity supplied divided by percentage change in price.

Important Formulas (Chapter 4)

Total Revenue: TR = p × q

Average Revenue: AR = TR ÷ q = p

Marginal Revenue: MR = ΔTR ÷ Δq = p (for a price-taking firm)

Profit: π = TR − TC

Profit-maximising output: p = MC, with MC rising and p ≥ AVC (short run) / p ≥ AC (long run)

Market supply: Sm(p) = S1(p) + S2(p) + … + Sn(p) (horizontal summation)

Price elasticity of supply: eS = (Percentage change in quantity supplied) ÷ (Percentage change in price) = (ΔQ ÷ Q) ÷ (ΔP ÷ P) = (ΔQ ÷ ΔP) × (P ÷ Q)

NCERT Exercises — Full Solutions

All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter Exercises. Answers are original; numerical problems are solved with complete working.

1. What are the characteristics of a perfectly competitive market?

ANSWER A perfectly competitive market has four defining features: (i) Large number of buyers and sellers — each is very small relative to the market, so no single buyer or seller can influence the price. (ii) Homogeneous product — the product of every firm is identical, so a buyer is indifferent about which firm she buys from. (iii) Free entry and exit — firms can enter or leave the market freely, which keeps the number of firms large. (iv) Perfect information — all buyers and sellers know the price, quality and other relevant details of the product and the market. Together these features lead to the single most important characteristic: price-taking behaviour, where each firm accepts the market price as given.

2. How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?

ANSWER The total revenue (TR) of a firm equals the market price (p) of the good multiplied by the quantity (q) the firm sells: TR = p × q. Since a perfectly competitive firm is a price-taker, p is constant. So total revenue is directly proportional to the quantity sold — the more units the firm sells at the fixed price, the higher its total revenue. When q = 0, TR = 0; for example, if p = Rs 10, selling 3 units gives TR = 10 × 3 = Rs 30.

3. What is the ‘price line’?

ANSWER The price line is a horizontal straight line drawn at the level of the market price, showing the relationship between the market price and a firm’s output. Because the price is fixed at p for a price-taking firm, plotting price (y-axis) against output (x-axis) gives a horizontal line that meets the y-axis at height p. The price line is also the firm’s average revenue curve and its demand curve under perfect competition. As it is horizontal, the demand facing the firm is perfectly elastic — the firm can sell any quantity it wishes at the price p.

4. Why is the total revenue curve of a price-taking firm an upward-sloping straight line? Why does the curve pass through the origin?

ANSWER For a price-taking firm, TR = p × q where p is constant. This is the equation of a straight line of the form y = (constant) × x, so the TR curve is an upward-sloping straight line; revenue rises by a fixed amount p for every additional unit sold. Its slope equals the market price p. The curve passes through the origin because when output is zero (q = 0), total revenue is also zero (TR = p × 0 = 0). Hence the curve starts at point O, where both output and revenue are nil.

5. What is the relation between market price and average revenue of a price-taking firm?

ANSWER Average revenue is total revenue per unit of output: AR = TR/q. Since TR = p × q, we get AR = (p × q)/q = p. Therefore, for a price-taking firm, average revenue is always equal to the market price. The AR curve is the horizontal price line at height p.

6. What is the relation between market price and marginal revenue of a price-taking firm?

ANSWER Marginal revenue is the increase in total revenue from selling one more unit: MR = ΔTR/Δq. If output changes from q1 to q2 at price p, then MR = (pq2 − pq1)/(q2 − q1) = p(q2 − q1)/(q2 − q1) = p. So for a price-taking firm, marginal revenue equals the market price. Intuitively, each extra unit is sold at the market price, so the addition to revenue is exactly p. Thus MR = AR = p.

7. What conditions must hold if a profit-maximising firm produces positive output in a competitive market?

ANSWER If a profit-maximising firm produces a positive level of output, three conditions must hold at that output level: (i) The market price equals marginal cost: p = MC (since MR = p, this is the same as MR = MC). (ii) The marginal cost is non-decreasing (the MC curve is rising or flat, not falling) at that output. (iii) The price must cover variable/total costs: in the short run, p ≥ AVC; in the long run, p ≥ AC.

8. Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.

ANSWER No. A profit-maximising firm cannot produce a positive output where the market price is not equal to marginal cost. If p > MC, then selling one more unit adds more to revenue (MR = p) than to cost (MC), so profit rises by producing more — the firm has not yet maximised profit. If p < MC, the last unit added more to cost than to revenue, so the firm can increase profit by producing less. Profit stops rising and is maximised only where the addition to revenue equals the addition to cost, i.e. p = MC. Hence at the profit-maximising positive output, price must equal marginal cost.

9. Will a profit-maximising firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.

ANSWER No. A profit-maximising firm will not produce a positive output where marginal cost is falling, because the second condition requires MC to be non-decreasing at the chosen output. Suppose price equals MC at a point on the downward-sloping (falling) part of the MC curve. For outputs slightly to the left of this point, MC is higher than the price — meaning those units cost more to produce than they earn, so the firm is making a loss on them and reducing total profit. By cutting output below this point the firm would actually improve its profit, so such a point cannot be profit-maximising. The profit-maximising output therefore always lies on the rising part of the MC curve.

10. Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC? Give an explanation.

ANSWER No. In the short run, if the market price is less than the minimum AVC, the firm produces zero output. If the firm produces a positive quantity where p < AVC, its total revenue (price × quantity) is less than its total variable cost (AVC × quantity), so it cannot even cover its variable costs and loses an amount greater than its fixed cost. If instead it produces nothing, its loss equals only its total fixed cost (TFC), which is smaller. Since producing nothing gives a smaller loss, the firm shuts down. So whenever p < minimum AVC, the firm supplies zero output in the short run.

11. Will a profit-maximising firm in a competitive market produce a positive level of output in the long run if the market price is less than the minimum of AC? Give an explanation.

ANSWER No. In the long run, if the market price is less than the minimum (long-run) average cost, the firm produces zero output. In the long run all costs are variable, so the firm must cover its full average cost. If p < LRAC, total cost (LRAC × quantity) exceeds total revenue (price × quantity), and the firm incurs a loss. By shutting down it earns a profit of zero, which is better than a loss. Therefore the firm chooses to exit and produces nothing whenever p < minimum LRAC.

12. What is the supply curve of a firm in the short run?

ANSWER A firm’s short-run supply curve is the rising part of the short-run marginal cost (SMC) curve from and above the level of minimum average variable cost (AVC), together with zero output for all prices strictly less than the minimum AVC. In other words, for prices at or above minimum AVC the firm equates price with SMC on the upward-sloping part of SMC; for prices below minimum AVC it shuts down and supplies nothing. The minimum-AVC point is the short-run shut-down point.

13. What is the supply curve of a firm in the long run?

ANSWER A firm’s long-run supply curve is the rising part of the long-run marginal cost (LRMC) curve from and above the level of minimum long-run average cost (LRAC), together with zero output for all prices less than the minimum LRAC. For prices at or above minimum LRAC the firm equates price with LRMC on the upward-sloping part of the LRMC curve; below minimum LRAC the firm exits and supplies nothing. The minimum-LRAC point is the long-run shut-down (and break-even) point.

14. How does technological progress affect the supply curve of a firm?

ANSWER Technological progress (such as an organisational innovation) allows the firm to produce the same output using fewer inputs, which lowers its marginal cost at every level of output. The marginal cost curve shifts to the right (downward). Since the firm’s supply curve is a segment of its MC curve, technological progress shifts the supply curve to the right. At any given market price, the firm now supplies a larger quantity of output.

15. How does the imposition of a unit tax affect the supply curve of a firm?

ANSWER A unit tax is a tax of Rs t the government levies on each unit produced. Because the firm must pay an extra Rs t for every unit, both its average cost and its marginal cost at any output level rise by Rs t — the MC (and AC) curves shift upward. As the supply curve is the rising part of the MC curve, the unit tax shifts the firm’s supply curve to the left (upward). At any given market price, the firm now supplies fewer units of output.

16. How does an increase in the price of an input affect the supply curve of a firm?

ANSWER An increase in the price of an input (for example, a rise in the wage rate of labour) raises the cost of production. The firm’s average cost and, along with it, its marginal cost at every output level increase, shifting the MC curve upward (to the left). Since the supply curve is a part of the MC curve, the firm’s supply curve shifts to the left. At any given market price, the firm now supplies fewer units of output.

17. How does an increase in the number of firms in a market affect the market supply curve?

ANSWER The market supply curve is derived by the horizontal summation of the supply curves of all the firms in the market, for a fixed number of firms. When the number of firms increases, more output is supplied at every market price, so the market supply curve shifts to the right. (Conversely, a fall in the number of firms shifts the market supply curve to the left.)

18. What does the price elasticity of supply mean? How do we measure it?

ANSWER Price elasticity of supply (eS) measures the responsiveness of the quantity supplied of a good to a change in its price. It is defined as the percentage change in quantity supplied divided by the percentage change in price: eS = (Percentage change in quantity supplied) ÷ (Percentage change in price) = (ΔQ/Q) ÷ (ΔP/P) = (ΔQ/ΔP) × (P/Q). When the supply curve is vertical, supply is completely insensitive to price and eS = 0; when the supply curve is positively sloped, eS is positive. Like the price elasticity of demand, the price elasticity of supply is independent of units.

19. Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs 10.

ANSWER For a price-taking firm: TR = p × q = 10q; AR = TR/q = p = Rs 10 (for q ≥ 1); MR = ΔTR/Δq = Rs 10 for each additional unit. (AR and MR are undefined at q = 0.)
Quantity SoldTR (Rs)MR (Rs)AR (Rs)
00––
1101010
2201010
3301010
4401010
5501010
6601010
As expected for a competitive firm, MR = AR = market price = Rs 10 at every output level.

20. The following table shows the total revenue and total cost schedules of a competitive firm. Calculate the profit at each output level. Determine also the market price of the good.

ANSWER Profit = TR − TC at each output level. Market price = AR = TR/Q (for Q ≥ 1), which is constant.
Quantity SoldTR (Rs)TC (Rs)Profit = TR − TC (Rs)
005−5
157−2
210100
315123
420155
525232
63033−3
73540−5
Market price: price = TR ÷ quantity. For example, at Q = 1, p = 5/1 = Rs 5; at Q = 5, p = 25/5 = Rs 5; at Q = 7, p = 35/7 = Rs 5. The price is constant, so the market price = Rs 5. (Maximum profit of Rs 5 occurs at output 4, where p = MC.)

21. The following table shows the total cost schedule of a competitive firm. It is given that the price of the good is Rs 10. Calculate the profit at each output level. Find the profit maximising level of output.

ANSWER TR = price × output = 10 × Q. Profit = TR − TC at each output level.
OutputTC (Rs)TR = 10 × Q (Rs)Profit = TR − TC (Rs)
050−5
11510−5
22220−2
327303
431409
5385012
6496011
763707
88180−1
910190−11
10123100−23
Profit-maximising output = 5 units, where profit is highest at Rs 12. (Beyond 5 units, profit begins to fall as MC exceeds the price of Rs 10.)

22. Consider a market with two firms. The following table shows the supply schedules of the two firms: the SS1 column gives the supply schedule of firm 1 and the SS2 column gives the supply schedule of firm 2. Compute the market supply schedule.

ANSWER Market supply at each price = SS1 + SS2 (horizontal summation).
Price (Rs)SS1 (units)SS2 (units)Market Supply = SS1 + SS2 (units)
0000
1000
2000
3112
4224
5336
6448

23. Consider a market with two firms. In the following table, columns labelled as SS1 and SS2 give the supply schedules of firm 1 and firm 2 respectively. Compute the market supply schedule.

ANSWER Market supply at each price = SS1 + SS2.
Price (Rs)SS1 (kg)SS2 (kg)Market Supply = SS1 + SS2 (kg)
0000
1000
2000
3101
420.52.5
5314
641.55.5
7527
862.58.5

24. There are three identical firms in a market. The following table shows the supply schedule of firm 1. Compute the market supply schedule.

ANSWER Since the three firms are identical, each supplies the same quantity as firm 1 at every price. So market supply = 3 × SS1.
Price (Rs)SS1 (units)Market Supply = 3 × SS1 (units)
000
100
226
3412
4618
5824
61030
71236
81442

25. A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?

ANSWER Step 1 — Find the quantities. Quantity = Revenue ÷ Price.
At P1 = Rs 10: Q1 = 50/10 = 5 units.
At P2 = Rs 15: Q2 = 150/15 = 10 units. Step 2 — Percentage change in quantity. %ΔQ = (Q2 − Q1)/Q1 × 100 = (10 − 5)/5 × 100 = 100%. Step 3 — Percentage change in price. %ΔP = (P2 − P1)/P1 × 100 = (15 − 10)/10 × 100 = 50%. Step 4 — Elasticity. eS = %ΔQ ÷ %ΔP = 100 ÷ 50 = 2. The firm’s supply is elastic (eS > 1).

26. The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.

ANSWER Given: P1 = Rs 5, P2 = Rs 20, ΔQ = +15 units, eS = 0.5. Step 1 — Percentage change in price. %ΔP = (20 − 5)/5 × 100 = 300%. Step 2 — Percentage change in quantity. Using eS = %ΔQ ÷ %ΔP, we get %ΔQ = eS × %ΔP = 0.5 × 300 = 150%. Step 3 — Initial output. %ΔQ = (ΔQ/Q1) × 100, so 150 = (15/Q1) × 100 ⇒ Q1 = 1500/150 = 10 units. Step 4 — Final output. Q2 = Q1 + ΔQ = 10 + 15 = 25 units. So the initial output is 10 units and the final output is 25 units.

27. At the market price of Rs 10, a firm supplies 4 units of output. The market price increases to Rs 30. The price elasticity of the firm’s supply is 1.25. What quantity will the firm supply at the new price?

ANSWER Given: P1 = Rs 10, Q1 = 4 units, P2 = Rs 30, eS = 1.25. Step 1 — Percentage change in price. %ΔP = (30 − 10)/10 × 100 = 200%. Step 2 — Percentage change in quantity. %ΔQ = eS × %ΔP = 1.25 × 200 = 250%. Step 3 — Change in quantity. ΔQ = (%ΔQ/100) × Q1 = (250/100) × 4 = 10 units. Step 4 — New quantity. Q2 = Q1 + ΔQ = 4 + 10 = 14 units. The firm will supply 14 units at the new price of Rs 30.

Extra Practice Questions

Short Answer Type Questions

Q1. Why is the demand curve facing a perfectly competitive firm perfectly elastic?

ANSWERBecause the firm is a price-taker, it can sell any quantity at the market price p but nothing above it. So the demand curve it faces is a horizontal line (the price line) at height p, which means demand is perfectly elastic — quantity demanded from the firm can change without any change in price.

Q2. Distinguish between the short-run and long-run shut-down points of a firm.

ANSWERThe short-run shut-down point is the minimum-AVC point (where SMC cuts AVC); below this price the firm produces nothing in the short run. The long-run shut-down point is the minimum-LRAC point; below this price the firm exits in the long run. The difference arises because fixed costs exist only in the short run.

Q3. What is normal profit? Why is it treated as part of cost?

ANSWERNormal profit is the minimum profit needed to keep a firm in its existing business; a firm earning less than this will leave. It is treated as part of total cost because it is the opportunity cost of entrepreneurship — the return the entrepreneur could have earned in the next-best activity.

Q4. Define the break-even point of a firm.

ANSWERThe break-even point is the point on the supply curve at which the firm earns only normal profit (zero super-normal profit). It is the minimum-average-cost point where the supply curve cuts the LRAC curve in the long run (or the SAC curve in the short run).

Q5. A firm’s supply is given by S(p) = 0 for p < 10 and S(p) = p − 10 for p ≥ 10. How much does it supply at p = 8 and at p = 25?

ANSWERAt p = 8 (which is less than 10), the firm supplies 0 units. At p = 25 (which is ≥ 10), it supplies p − 10 = 25 − 10 = 15 units.

Long Answer Type Questions

Q1. Explain the three conditions that must hold for a profit-maximising firm to produce a positive output in the short run.

ANSWERFirst, price must equal marginal cost (p = MC). Since MR = p for a price-taker, this is the same as MR = MC. As long as MR > MC the firm gains by producing more, and when MR < MC it gains by producing less; profit is maximised where the two are equal. Second, marginal cost must be non-decreasing (rising) at that output. If p = MC on a falling part of the MC curve, output levels just to the left would have MC above price, meaning the firm could raise profit by reducing output — so such a point is not a maximum. Third, in the short run price must be at least the minimum average variable cost (p ≥ AVC). If p < AVC, the firm cannot cover even its variable costs and its loss would exceed its fixed cost; it does better by shutting down and losing only fixed cost. When all three conditions hold, the firm is genuinely at its profit-maximising positive output.

Q2. Derive the short-run supply curve of a competitive firm and explain why it has the shape it does.

ANSWERIn the short run, when the market price is greater than or equal to the minimum AVC, the firm equates price with SMC on the rising part of the SMC curve, and since p ≥ AVC all three profit-maximising conditions are met — so output is positive and read off the rising SMC curve. As price rises, the equilibrium moves up the rising SMC curve and output increases, so this portion slopes upward. However, when the price falls below the minimum AVC, the firm cannot cover its variable costs, so it shuts down and supplies zero output. Combining the two cases, the short-run supply curve is the rising part of the SMC curve from and above minimum AVC, together with the vertical axis (zero output) for all prices below minimum AVC. Its upward slope reflects that higher prices justify producing more (higher-MC) units, and the kink at minimum AVC marks the shut-down point.

Q3. Explain how the market supply curve is derived from individual firms’ supply curves, using the example of two firms with different cost structures.

ANSWERThe market supply at any price is the sum of the quantities supplied by all firms at that price — obtained by the horizontal summation of individual supply curves. Consider two firms where firm 1 supplies nothing below price p1 and firm 2 nothing below a higher price p2. For market prices below p1, both produce zero, so market supply is zero. For prices from p1 up to (but below) p2, only firm 1 produces, so the market supply curve coincides with firm 1’s supply curve. For prices at or above p2, both firms produce, so we add their quantities: at a price p3 > p2, if firm 1 supplies q3 and firm 2 supplies q4, market supply is q3 + q4. The resulting market supply curve is flatter (more elastic) than either individual curve. This curve is drawn for a fixed number of firms; if more firms enter, it shifts to the right, and if firms leave, it shifts to the left.

MCQs & Assertion–Reason

1. Which of the following is NOT a feature of perfect competition?

(a) Large number of buyers and sellers    (b) Homogeneous product    (c) Differentiated products    (d) Free entry and exit

2. For a price-taking firm, the relation between AR, MR and price p is:

(a) AR > MR = p    (b) AR = MR = p    (c) AR = MR < p    (d) MR > AR = p

3. The total revenue curve of a perfectly competitive firm is:

(a) a downward-sloping straight line    (b) a horizontal line    (c) an upward-sloping straight line through the origin    (d) a U-shaped curve

4. A profit-maximising competitive firm produces where:

(a) p > MC    (b) p = MC with MC rising    (c) p = MC with MC falling    (d) p < MC

5. In the short run, a firm shuts down when the market price is below the minimum of:

(a) AVC    (b) AFC    (c) AC    (d) MC

6. The price line facing a perfectly competitive firm is also its:

(a) marginal cost curve    (b) total cost curve    (c) average revenue (demand) curve    (d) supply curve

7. The market supply curve is obtained by the:

(a) vertical summation of demand curves    (b) horizontal summation of firms’ supply curves    (c) vertical summation of MC curves    (d) average of firms’ supply curves

8. The imposition of a unit tax shifts a firm’s supply curve to the:

(a) right    (b) left    (c) it stays unchanged    (d) it becomes horizontal

9. If the price of a good rises from Rs 10 to Rs 20 and the quantity supplied rises from 100 to 200 units, the price elasticity of supply is:

(a) 0.5    (b) 1    (c) 1.5    (d) 2

10. When the supply curve is a vertical straight line, the price elasticity of supply is:

(a) infinity    (b) greater than 1    (c) equal to 1    (d) zero

Answer key: 1-(c), 2-(b), 3-(c), 4-(b), 5-(a), 6-(c), 7-(b), 8-(b), 9-(b), 10-(d).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: For a perfectly competitive firm, marginal revenue equals the market price.

Reason: Each additional unit is sold at the constant market price, so the addition to total revenue is the price.

A-R 2. Assertion: A profit-maximising firm can produce a positive output where marginal cost is falling.

Reason: For profit maximisation, marginal cost must be non-decreasing at the chosen output.

A-R 3. Assertion: In the short run a firm may continue to produce even when the market price is below its average cost.

Reason: In the short run the firm produces as long as the price is at least the minimum average variable cost.

A-R 4. Assertion: Technological progress shifts a firm’s supply curve to the right.

Reason: Technological progress lowers the firm’s marginal cost at every level of output.

A-R 5. Assertion: The market supply curve shifts to the right when the number of firms in the market increases.

Reason: An increase in the number of firms means more output is supplied at every market price.

Answer key: 1-(A), 2-(D), 3-(A), 4-(A), 5-(A).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Memorise the four features of perfect competition and the equality AR = MR = p. For profit-maximisation answers always state all three conditions together (p = MC, MC non-decreasing, p ≥ AVC/AC). In numericals, write the formula first, then substitute — for elasticity use eS = %ΔQ ÷ %ΔP and always compute quantities from revenue ÷ price when revenue is given. Present supply-schedule answers as a neat table with a clear “Market Supply” column. For profit tables, show TR, TC and Profit columns and explicitly identify the profit-maximising output. Remember that the firm’s supply curve is the rising part of MC above the shut-down point.

Common mistakes to avoid

  • Confusing the short-run shut-down rule (p < min AVC) with the long-run rule (p < min AC/LRAC).
  • Writing AR or MR at q = 0 in revenue schedules — they are undefined when no unit is sold.
  • Forgetting that MC must be rising at the profit-maximising output, not just equal to price.
  • Adding firms’ supply curves vertically instead of horizontally for the market supply curve.
  • In elasticity numericals, dividing changes by the new value instead of the initial value (P1, Q1).
  • Forgetting to derive quantity from revenue ÷ price before computing elasticity (Q19, Q25).
  • Treating a unit tax as shifting supply to the right — it raises MC, so supply shifts left.

Frequently Asked Questions

What is Chapter 4 of Class 12 Economics (Introductory Microeconomics) about?

Chapter 4, The Theory of the Firm under Perfect Competition, explains how a price-taking, profit-maximising firm decides its output. It covers revenue concepts (TR, AR, MR), the three conditions for profit maximisation (p = MC, MC non-decreasing, p ≥ AVC/AC), the short-run and long-run supply curves, the market supply curve, and the price elasticity of supply.

Why does MR = AR = price under perfect competition?

Because the firm is a price-taker, every unit is sold at the same fixed market price p. Average revenue (TR/q) therefore equals p, and the extra revenue from selling one more unit (marginal revenue) also equals p. Hence MR = AR = market price, and the firm’s demand curve is a horizontal price line.

How do you solve the price elasticity of supply numericals in this chapter?

Use eS = (percentage change in quantity supplied) ÷ (percentage change in price), measuring each change relative to the initial value. If only revenue is given, first find quantity as revenue ÷ price. Rearrange the formula to find any missing value — for example %ΔQ = eS × %ΔP — as shown in the step-by-step solutions to Questions 25, 26 and 27 above.

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