2.3f The Supply Curve

B1 The firms and industry operating in a PC structureThe long and the short of it.B & D pp. 102-8

Print pages 2,4,6 + 9,11,12,131Sub-topicsAssumptions of the modelRevenue curvesProfit maximization in the SRProfit maximization in the LRShut-down price and break-even price

Learning ObjectivesDescribe, using examples, the assumed characteristics of perfect competition: a large number of firms; a homogeneous product; freedom of entry and exit; perfect information; perfect resource mobility. Explain, using a diagram, why, in the long run, a perfectly competitive firm will make normal profit. Explain, using a diagram, how a perfectly competitive market will move from short- run equilibrium to long-run equilibrium. Explain, using a diagram, when a loss-making firm would shut down and exit the market in the long run.

1. characteristics of perfect competitiona large number of firmsa homogeneous productfreedom of entry and exitperfect informationperfect resource mobilityIdentify 2-3 examples and justify that they are perfectly competitive:

Recall: how to calculate profitRecall: TR TC = ProfitThus: AR*Q AC*Q = ProfitRemember this is economic profit more than mere accounting profit.Thus we call zero economic profit = normal (5%?)More than that is supernormal; Less than that is subnormal

Marginal AnalysisRecall STEP ONE:Use the Marginal Cost and Marginal Revenue curves to determine the output where profit is maximisedRecall STEP TWO: Use the Average Cost and Average Revenue curves to determine what the profit (loss) will be.

Determine the profit situationMRMCACMax profit outputSupernormal profitACAR1. Mark the max profit output with a vertical marker2a. mark the AC at this output with a horizontal line2b. label the AR at this output

2c. If AR>AC shade in rectangle formed and label it Supernormal Profit

Determine the profit situationMRMCACMax profit outputSubnormal profitACAR1. Mark the max profit output with a vertical marker2a. mark the AC at this output with a horizontal line2b. label the AR at this output

2c. If ARAC the firm is earning profits in excess of normal. We call this supernormal profits When AR