theme 3 diagrams

cost curve

1. draw downward sloping demand curve=AR

2. marginal revenue curve twice as steep and follow through

3. draw average cost curve in

4. marginal cost curve cuts AC at it’s lowest point

5. cost, rev, price on y, output on x

profit maximisation

-point where MC = MR, draw down to x axis

-draw line up to average revenue and across and label as price

-if draw across from AC, forms a box which represents supernormal profits

revenue maximisation

-MR = 0

-draw up to AR and across and label price level, shows lower price level than profit maximising

-still making a supernormal profit just less

sales maximisation

-AC = AR

-not really any supernormal profits being made

long run average cost curves

-all factors of prod variable

-increasing these is called scaling, LR is about returns to scale

-1st part is increasing returns to scale

-2nd is constant

-3rd is decreasing

-if experience economies of scale the firm can have increasing returns to scale and vice versa

-the minimum efficient scale is the lowest level of output required to exploit full economies of scale, lowest point where LRAC stops decreasing

-can put in small SRAC curves at points 1,2,3 on with their lowest point on the line (U-shaped AC curves)

shut down point

productive efficiency

LR equilibrium in perfect comp

-when normal profit is being made

-any profit outside of normal profit is short run

-firm takes market price, makes normal profit with it

short run supernormal profit in perfect comp

-industry left, firm on the right

-firms take price at p1 from market

-this price is AR, MR and D curve

-supernormal profit will be where AR above AC

-firm is profit max so produce where MC = MR, forms supernormal box

-this profit attracts new firms, shifting supply to the right and price falls until no more supernormal profit

-AR now equal to MC so normal profit (level with new supply shift)

losses/subnormal profit

opposite to supernormal profit, firms leave

d=mr=ar below AC, so costs higher than rev in SR

monopolistic comp in SR

-MR=MC as profit max

-draw up to demand (AR) curve, and across from AC for supernormal profit

monopolistic comp in LR

-new firms attracted by supernormal profit

-due to low barriers and decent info in monopolistic comp

-causes demand for individual firms to shift left until normal profit where AR=AC

-Profit max at MC=MR and up to demand curve

-AC hits this point on demand curve (p1q1)and goes through MC at its lowest point