Labelling Graph Axis Correctly

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1 Labelling Graph Axis Correctly The Industry Price S D The Firm Quantity MC AC AR=MR Output

2 Perfect Competition All of the units are sold at the same price because no single buyer or seller is large enough to influence the market price

3 Axis? One firm comprises the whole industry Monopoly Oligopoly Perfect Competition Large number of small firms A few firms dominate the industry

4 Starter Using page create a colourful and memorable thought shower of the 7 key characteristics of a perfectly competitive market

5 Recap... Of what PC looks like and why

6 Key Terms Profits: when total income or revenue is greater than total costs Total Revenue: what the firm receives for the sale of its products =price x number sold Average Revenue: total revenue / number sold Marginal Revenue: the addition to total revenue from the production of one extra unit Price Taker: a firm that has to accept the price ruling in the market Price Leader: a firm that establishes the market price that all other firms in the market follow

7 Revenue in a Perfectly Competitive Market All of the units are sold at the same price because no single buyer or seller is large enough to influence the market price Output Price per unit s Total Revenue s Average Revenue s Marginal Revenue s Average and Marginal revenue are equal because each unit is sold at the same price

8 Revenue in a Perfectly Competitive Market Price What would the D curve look like in a perfectly competitive market? What is the relationship between average revenue, marginal revenue and price? Quantity

9 Revenue in a Perfectly Competitive Market D = AR = MR = P Price 500 D = AR = MR = P Irrelevant of quantity price per unit remains at Quantity Revenue is represented by the area of the rectangle (price x units sold)

10 Perfect Competition in the Short Run Market forces have determined that the market price is P1 Because the market is perfectly competitive, the firm is a price taker and must sell its products at P1 Therefore the firm has a horizontal, or perfectly elastic demand curve A firms demand curve is the same as its AR curve When AR is constant like this it also equals MR

11 Perfect Competition in the Short Run We assume that the firm wants to profit maximise and so it operates at output Q, where MR=MC At this level of output AR is less than AC which means that the firm is making a loss (shaded red area = loss) In this example it is not possible for the firm to make a profit; the best it can do is to minimise its losses which it does at point Q Profit Maximisation is when MR=MC Profit = (AR-AC) X Output

12 Perfect Competition in the Short Run In the short run it is possible that subnormal or supernormal profits will be made However, in the long run the supernormal profits will be competed away as more firms enter the market or subnormal profits will disappear as firms exit the market In the long run, when the market is in equilibrium, normal profits will be made by all firms Profit Maximisation is when MR=MC Profit = (AR-AC) X Output

13 Profits Recap Profits: when total income or revenue is greater than total costs Normal Profit: the amount required to keep a factor employed in its present activity in the long run When AR=AC Because costs include normal profit, therefore when costs are covered normal profit is made Supernormal Profit: a return above normal profit a surplus payment When AR>AC Profit = (AR-AC) X Output Subnormal Profit: profit below normal which should lead to firms leaving the industry When AC>AR

14 Perfect Competition in the Long Run Because firms are making a loss many will leave the industry, this is easily done in a perfectly competitive market as there are no exit barriers The number of firms in the industry will fall, reducing S1 to S2, pushing price up from P1 to P2 Because the firm is a price taker it must now sell all its products at P2

15 Perfect Competition in the Long Run The increase from P1 to P2 increases AR and MR Again the firm will operate at its profit maximising output where MC=MR2, this is point Q2 Where the firm produces Q2 the average revenue equals the average cost so the firm is no longer making a loss and is happy to continue to operate Because AR2=AC it is making a normal profit (the amount required to keep a factor employed in its present activity in the long run) as this is included in cost figures which are covered by AR2

16 Task 1. Read page 29 to page Complete Activity questions 1-3 on page Complete Activity questions 1-4 on page 32

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