# Price determined by S & D Price taker Won’t charge higher or lower than market price Horizontal (perfectly elastic) at market price.

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Price determined by S & D Price taker Won’t charge higher or lower than market price Horizontal (perfectly elastic) at market price.

Market demand Individual firm

Firms aim to maximise profit Two rules for profit-maximisation shut-down rule profit maximising rule

The shut-down rule: a firm should produce only if total revenue is equal to, or greater than, total variable cost (which includes normal profit).

Profit is maximised where marginal revenue (MR) is equal to marginal cost (MC). In summary… When MR > MC, output should be expanded When MR = MC, profits are maximised When MR < MC, output should be reduced

POINT a: MR (R10) – MC (R4) = R6 POINT b: MR (R10) – MC (R6) = R4POINT c: MR (R10) – MC (R8) = R2POINT d: MR (R10) – MC (R10) = R0POINT e: MR (R10) – MC (R12) = -R2

Profit Maximising Level Profit Maximising Level Perfect Competition Perfect Competition

Normal profits: occur when total costs = total revenue. Minimum earnings required to prevent entrepreneur leaving and applying factors of production elsewhere.

Profit is maximised where MR = MC = P 2 This occurs at Q 2 At Q 2, AR = P 2 = AC (C 2 ) As AR = AC, the firm does not earn an economic profit. Normal profit earned, since all its costs, including self-employed resources, are fully covered. E 2 aka break even point

Can also be found by TR - TC TR = P 2 X Q 2 = 0P 2 E 2 Q 2 TC = C 2 X Q 2 = 0C 2 E 2 Q 2 0C 2 E 2 Q 2 (TC) = 0P 2 E 2 Q 2 (TR)

Economic profits: profit that a business makes that is more than the normal profit. Economic profit occurs when total revenue > total costs. AKA excess profit, abnormal profit, supernormal profit or pure profit.

Profit is maximised where MR = MC = P 3 This occurs at Q 3 At Q 3, AR = P 3 and AC = C 1 At Q 3, AR (P 3 ) > AC (C 1 ) Economic profit earned – above breakeven point.

Can also be found by TR - TC TR = P 3 X Q 3 = 0P 3 E 3 Q 3 TC = C 1 X Q 3 = 0C 1 MQ 3 0P 3 E 3 Q 3 (TR) > 0C 1 MQ 3 (TC) Difference = Economic Profit = C 1 P 1 E 3 M

Economic loss: occurs when a firm makes less than normal profit. I.e. price (AR) < AC

Profit is maximised where MR = MC = P 3 This occurs at Q 3 At Q 3, AR = P 3 and AC = C 3 At Q 3, AR (P 3 ) < AC (C 3 ) Economic loss = C 3 – P 3

Can also be found by TR - TC TR = P 3 X Q 3 = 0P 3 E 3 Q 3 TC = C 3 X Q 3 = 0C 3 MQ 3 0P 3 E 3 Q 3 (TR) < 0C 1 MQ 3 (TC) Difference = Economic Loss = P 3 C 3 ME 3

If a firm is making an economic loss, should they leave the market? Depends on average revenue (P) relative to average VARIABLE costs. If P < AVC, best to leave the industry.

a situation where it is impossible to reallocate the resources to make at least one person better off without making someone else worse off. Allocative efficiency: a situation where it is impossible to reallocate the resources to make at least one person better off without making someone else worse off. it is possible to make at least one person better off without making someone else worse off. Allocative inefficiency: it is possible to make at least one person better off without making someone else worse off. In such a case the welfare of society can be improved by reallocating the resources.

Society’s welfare maximised when… P (OC of consuming extra unit) = MC (OC of producing extra unit) Are perfectly competitive firms allocatively efficient? P = MR Profit maximisation at MR = MC Therefore they produce at P = MR = MC

occurs when all the firms in the industry produce where their long-run average or unit costs are at a minimum. Productive efficiency: occurs when all the firms in the industry produce where their long-run average or unit costs are at a minimum. When this occurs – no waste of scarce resources. Perfectly competitive firms in equilibrium in the long run where average cost is at a minimum – thus productively efficient.

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