Outcomes

Explain and illustrate why a firm will maximise profit or mimimise

loss at the output level of MC = MR.
Calculate, illustrate and explain the short term situations of a perfect
competive firm under the following situations. (Revision):
Economic profit; Normal profit; Loss & closing down
point.
Explain and illustrate the requirements for a firm to reach long run
equilibrium.
Explain the meaning of production efficiency by referring to perfect
competition.
Explain how movements in supply and demand can influence both
the long run and short run situation of the firm.
Illustrate and explain the difference between increasing, decreasing
and constant industries

Profits
Economic profit: the difference between
total revenue and total cost, where total
cost includes all costsboth explicit and
implicitassociated with resources used
by the firm.
Accounting profit is simply total revenue
less all explicit costs incurred.
does not subtract the implicit costs.

The Four Conditions For Perfect

Competition
1.

Firms Sell a Standardized Product

The product sold by one firm is assumed to be a perfect
substitute for the product sold by any other.

2.

Firms Are Price Takers

This means that the individual firm treats the market price of
the product as given.

3.

Free Entry and Exit

With Perfectly Mobile Factors of Production in the Long Run

4.

Firms and Consumers Have Perfect Information

SR Condition for Profit Maximisation

Firm only controls output.
But how much must it produce to maximise its profits?

Firm will maximise profits at the output level where

MC=MR
Therefore: when P = MR and MR = MC
then P = MR = MC
But what of MC > MR of MR > MC?
Must the firm produce less or more? Why?

Efficient allocation of resources: P = MC

Condition that all possible benefits of trade have been reached.

The Short-run Condition For

Profit Maximization
Marginal revenue: the change in total
revenue that occurs as a result of a 1-unit
change in sales.
To maximize profits the firm should
produce a level of output for which
marginal revenue is equal to marginal cost
on the rising portion of the MC curve.

Figure 9.3: The Profit-Maximizing

Output Level in the Short-Run
R/unit output

Pq = 180 = MR

180

Q* = 74

Adjustments in the Long Run

Makes a normal profit where P=ATC
No incentive for new firms to enter the industry

Produces level of output where P=MC=MR

No incentive to produce less or more

No firm has the incentive to change its inputs in

order to change their current output levels
SRATC = LRATC at the level of output where P = MC.

Figure 9.14: A Step along the Path

Toward Long-Run Equilibrium

Figure 9.15: The Long-Run Equilibrium

under Perfect Competition

Reasons why PC markets are

efficient
Production efficient: firm produces output at
lowest possible cost (lowest ATC)
Allocative efficient: no wastage use
resources/inputs effectively
P= MC
Producer and consumer surplus are
maximized
Thus P = MC=MR = minimum point on ATC

The Long-run Competitive Industry

Supply Curve
Constant cost Industries: long-run
supply curve is a horizontal line at the
minimum value of the LAC curve.
Increasing cost industries: long-run
supply curve is upward sloping.
Decreasing cost industries: long-run
supply curve is downward-sloping.

Fig. 9.16: Constant cost industry

Fig. 9.19: Decreasing cost industry

Figure 9.18: Long-Run Supply Curve

for an Increasing Cost Industry