Part 2: Pure competition

Lecture slides: 25- 45

Again, what are the two approaches to analyse maximising profit in the short run

• Total Revenue and Total Cost Approach

• Marginal Revenue and Marginal cost approach

In the MR &MC approach, what does the firm compare

The amount that each additional unit of output will add to total revenue

What does it mean when

• MR>MC

• MC>MR

• The most recent additional unit(last unit) produced brings in more revenue than the cost, so it’s worth producing

• The last unit costs more than it earns, so it reduces the profit

Typically when output is relatively low _____ will exceed Marginal cost and the production is _____

BUT

When output is relatively large ______ will exceed marginal revenue and the firm will wan to _______

What’s the MR=MC Rule and for pure competition, how can it be reinstated?

Produce until Marginal revenue = Marginal cost, as long as Selling Price ≥ Average variable Cost. That’s where profit is maximized or loss minimized. If the selling price is smaller, then it is better to shut down

P=MR=MC

Why isn’t the profit-maximisation rule MR>MC instead

• MR > MC means the firm should keep producing more, because each extra unit is still adding to profit.

• But if you stop there, you haven’t yet reached the maximum — you’re still climbing.

• Profit maximisation happens exactly at MR = MC(peak-producing less, means leaving profit unearned and producing more means profit starts shrinking, mc>mr)

True/False

The profit maximisation rule of MR=MC applies to all types of firms

True

Why can we calculate economic profit like this (P-ATC) X Q

• Price (P) = selling price per unit.

• Average Total Cost (ATC) = cost per unit (explicit + implicit costs spread across output).

• Per‑unit profit = P−ATC.

Multiply by quantity (Q) → total economic profit.

👉 Example:

• Price per unit = R131

• ATC per unit = R98

• Per‑unit profit = R33

• If Q = 9 units → Economic profit = 33×9=R297

For per-unit profit : P-ATC

• If positive →

• If zero →

• If negative →

• economic profit per unit.

• normal profit (break‑even).

• economic loss per unit.

How to get the economic profit with the graph

• AREA

• Width: P-ATC(per-unit profit)

• Length: Q (Units produced at MR=MC)

What do each of these graphs represent

• Economic profit

• Normal profit

• Economic loss

What’s true, what’s false

• True

• False

• False: firm demand is horizontal perfect elastic

• true

• true

Whats true,whats false

• False,Y

• No,on A

• True

• Yes

• False,economic profit (price above ATC)

What does the intersection of mc and atc mean?

• The intersection point is the minimum of the ATC curve.

• Reason:

  • When MC < ATC, it pulls ATC down.

(If the cost of the next unit (MC) is lower than the current average (ATC), adding it reduces the overall average.

Example: If your average meal cost is R100, and the next meal costs R70, the new average drops below R100.)

• When MC > ATC, it pushes ATC up.

• So the only point where ATC stops falling and starts rising is exactly where MC = ATC.

Are Profit maximisation and loss minimisation the same thing,just said diffferently?

NO,JUST RELATED

• Profit maximisation:

  • Happens when Total Revenue > Total Cost.

  • The firm chooses the output where MR = MC to make the biggest possible economic profit.

• Loss minimisation:

  • Happens when Total Revenue < Total Cost.

  • The firm is still at MR = MC, but here the goal is to reduce losses as much as possible.

  • Producing at MR = MC ensures the firm loses the least compared to producing more (which increases losses) or less (which misses revenue that could cover some costs).

What does MR=MC mean in terms of loss minimisation

Even though the firm is losing overall,MR=MC is still gives the least possible loss

(Producing less would mean missing revenue that could cover some costs.

Producing more would mean MC > MR, so losses get bigger.)

True/false

In the short-run a firm will not incur fixed costs even if it does not produce

False,it will incur fixed costs

What is a sunk cost

ie.y ou eat a terrible $30 meal just to "get your money's worth," even though eating it makes you unhappy.

Whats the loss-minimizing case

Why does for lose R100 if they shut down

The firm would lose R100 if it shuts down because of fixed costs.

• Fixed costs (like rent, insurance, machinery) must be paid whether the firm produces or not.

• If the firm shuts down in the short run, it earns zero revenue but still owes those fixed costs.

The price is R71

Explain why this firm is experiencing a ‘shutdown case’

• With the supply schedule a frim will not produce at a price lower than the _______cost

• Quantity supplied increases as the ____increases

• _____increases as the price increases

• Minimum average variable cost

• Price

• Economic profit

i thought competitive firms where price takers wdym that quantity will increase as price increases, don’t these people produce any amount of output

• Market demand curve: Downward‑sloping. As the market price falls, the total quantity demanded in the whole market increases.

• Individual firm’s demand curve: Perfectly elastic (horizontal) at the market price. The firm is a price taker — it cannot set its own price.

So:

• When we say “quantity will increase as price increases,” we’re talking about the market as a whole. Higher price → more firms willing to supply → greater market quantity supplied.

• For a single competitive firm, it can produce any amount of output at the given market price. Its decision is not about changing price, but about choosing the output where MR = MC at that fixed price.

Why is the normal profit there

What happens at the different points

• Which portion of the MC curve forms the firm’s short-run supply curve ?

• What will the quantity be if the price is below the min. average variable cost

• How to get market supply