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y The industry¶s demand curve is negatively sloped, the firm¶s

demand curve is virtually horizontal.
y The competitive industry has output of 200 million tonnes
when the price is £3.
y The individual firm takes that market price as given and
considers producing up to say, 60,000 tonnes.
y The firm¶s demand curve in part (ii) is horizontal because any
change in output that this one firm could manage would leave
price virtually unchanged at £3.
 "#      

 
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y The table shows the calculation of total ( ) average (
) and

marginal revenue ( ) when market price is £3.00.
y Oor example when sales rise from 11 to 12 units, revenue
rises form £33 to £36 making marginal revenue equal to £3.
y The table illustrates the general result that when price I fixed
average revenue, marginal revenue, and price are all equal.
 
% 
& 
  


y The graph shows the data in Table 9.1.

y Because price does not change as the firm varies its output,
neither marginal nor average revenue varies with
output€both are equal to price.
y When price is constant, total revenue is a straight line
through the origin whose constant positive slope is the price
per unit.

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y The firm chooses the output for which Ô= above the level
of

y When price equals marginal cost, as at output Ñ , the firm
loses profits if it either increases or decreases its output.
y t any point left of Ñ , say Ñ
, price is greater than the
marginal cost, and it pays to increase output (as indicated by
the left-hand arrow).
y t any point to the right of Ñ  say Ñ, price is less than the
marginal cost, and it pays to reduce output (as indicated by
the right-hand arrow).

* #   #
  



y t each output the vertical distance between the  and 

curves shows by how much total revenue exceeds or falls
short of total cost.
y The gap is largest at output Ñ which is the profit-maximizing
output.
 
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y Oor a price-taking firm the supply curve has the same shape
as its  curve above the level of

y The point  where price, Ô, equals
 is the shutdown
point.
y s price rises from £2 to £3 to £4 to £5, the firm increases its
production from Ñ to Ñ to Ñ
to Ñ .
y Oor example at a price of £3, the firm produces output Ñ and
earns the contribution to fixed costs shown by the dark blue
shaded rectangle.
y The firm¶s supply curve is shown in part (ii).
y It relates market price to the quantity the firm will produce
and offer for sale.
y It has the same shape as the firm¶s  curve for all prices
above


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y The market price is Ô

y Because this price is below average total cost, the firm is
suffering losses shown by the light blue area.
y Because price exceeds average variable cost, the firm
continues to produce in the short run.
y Because price is less than
 the firm will not replace its
capital as it wears out.

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y The market price is Ô


y The firm is just covering its total costs.
y It will replace its capital as it wears out since its revenue is
covering the full opportunity cost of its capital.

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y The market price is Ô

y The firm is earning pure (or economic) profits in excess of all
its costs, as shown by the dark blue area.
y The firm will replace its capital as it wears out.
 
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y consumers¶ surplus is the area under the demand curve and above
the market price line.
y The equilibrium price and quantity are Ô and Ñ.
y The total value that consumers place on Ñ units of the product is
given by the sum of the dark yellow, light yellow, and dark blue areas.
y The amount that they pay is ÔÑ, the rectangle that consists of the
light yellow and dark blue areas.
y The difference, shown as the dark yellow area, is à
sumers¶
surÔus
 
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# . &/
y Êroducers surplus is the area above the supply curve and below the
market price line.
y The receipts of producers from the sale of Ñ units are also ÔÑ.
y The area under the supply curve, the blue-shaded area, is total
variable cost, which is the minimum amount that producers must
receive to induce them to supply the output.
y The difference, shown as the light yellow area, is Ôr uàers¶ surÔus
 
1 ##    !

    
y t the competitive equilibrium consumers¶ surplus is the dark
yellow area above the price line
y Êroducers¶ surplus is the light yellow area below the price line.
y Reducing the output to Ñ but keeping price at Ô lowers
consumers surplus by area 1.
y It lowers producers¶ surplus by area 2.
y ssume that producers are forced to produce output Ñ
and to
sell it to consumers, who are in turn forced to buy it at price Ô.
y Êroducers¶ surplus is reduced by area 3 (the amount by which
variable costs exceed revenue on those units).
y consumers¶ surplus is reduced by area 4 (the amount by which
expenditure exceeds consumers¶ satisfactions on those units).
y Only at the competitive output, Ñ, is the sum of the two
surpluses maximized.
 
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y The firm¶s existing plant has short-run cost curves ·
 and

 while market price is Ô 
y The firm produces Ñ, where  equals price and total costs are
just being covered.
y lthough the firm is in short-run equilibrium, it can earn profits by
building a larger plant and so moving downwards along its ü

curve.
 
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)#"


    

y Thus the firm cannot be in long-run equilibrium at any output

below Ñm, because average total costs can be reduced by
building a larger plant.
y If all firms do this, industry output will increase and price will
fall until long-run equilibrium is reached at price Ô
y |ach firm is then in short-run equilibrium with a plant whose
average cost curve is ·
 and whose short-run marginal
cost curve,  intersects the price line Ô at an output of qm.
y Because the ü
 curve lies above Ô everywhere except at
qm, the firm has no incentive to move to another point on its
ü
 curve by altering the size of its plant.
‡ Thus a perfectly competitive firm that is not at the minimum
point on its ü
 curve cannot be in long-run equilibrium.

2./
  #(

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y The initial curves are at ë and ·.

y |quilibrium is at  with price Ô and quantity Ñ.
y  rise in demand shifts the demand curve to ë taking the short-
run equilibrium to 
y wew firms now enter the industry, shifting the short-run supply
curve outwards.
y Êrice is pushed down until pure profits are no longer being
earned.
y t this point the supply curve is ·.
y The new equilibrium is
with price at Ô
and quantity Ñ
.
y The curves shift so that price returns to its original level, making
the long-run supply curve horizontal.

2./
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y The initial curves are at ë and ·.

y |quilibrium is at  with price Ô and quantity Ñ.
y  rise in demand shifts the demand curve to ë taking the short-
run equilibrium to 
y wew firms now enter the industry, shifting the short-run supply
curve outwards.
y Êrice is pushed down until pure profits are no longer being earned.
y t this point the supply curve is ·.
y The new equilibrium is
with price at Ô
and quantity Ñ
.
y Êrofits are eliminated and entry ceases before price falls to its
original level, giving the ü · curve a positive slope.

2./
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y The initial curves are at ë and ·.

y |quilibrium is at  with price Ô and quantity Ñ.
y  rise in demand shifts the demand curve to ë taking the short-
run equilibrium to 
y wew firms now enter the industry, shifting the short-run supply
curve outwards.
y Êrice is pushed down until pure profits are no longer being
earned.
y t this point the supply curve is ·.
y The new equilibrium is
with price at Ô
and quantity Ñ
.
y The price falls below its original level before profits return to
normal, giving the ü · curve a negative slope.