3. Short-run Equilibrium of a Firm Under
Pure Competition
- determined by the intersection of MR
and MC curves where MR = MC (or the
equilibrium of the competitive firm
which is also profit maximization).
4. Short-run equilibrium of a firm under pure
competition EARNING
MC AC
If MR = MC
P4 and MR > AC
PROFIT MR = Price - competitive firm
is earning pure
profit
Most profitable output
80
- this graph indicates 80 units at a price of P4 per unit as the most profitable output.
5. Short-run equilibrium of a firm under pure
competition LOSING
MC
AC
If AC > MR
- competitive firm
is losing
Price LOSS
MR = Price
Least loss output
Quantity
-to minimize the lose the firm should produce an output where Price = MC (or MR = MC)
7. Long-run equilibrium position of a competitive firm
MC
AC
MR = AC = MC = AC
Price
MR
Equilibrium point
Most profitable output
Quantity
8. Pure Monopoly
- Demand for the product of the firm is
same as the market demand of product
- demand curve is down sloping
- Monopolist can only increase his sales
by offering a lower unit price for its
product
9. Table 5.2. Demand and revenue schedule of a pure
monopolist.
QD PRICE TR MR
1 P 50 P 50P
2 45 90 P 40
3 40 120 30
4 35 140 20
5 30 150 10
6 25 150 0
7 20 140 - 10
10. D, MR, TR of an imperfect type of market
structure like the monopolist.
- More units are sold
at a lower price
TR - TR increases at a
decreasing rate
and then declines
after reaching its
Price
maximum
- MR is always lower
than the price
- At a lower price,
additional income
is lower than the
D previous additional
income
Units
MR
12. Profit maximization under the pure monopoly
P MC
AC
Price > AC
- Pure Monopolist
enjoys a
Monopoly Profit
monopoly profit
because there
are no
D (or price curve)
competitors
MC = MR
Most
Profitable
Output
O Q
units MR
13. Loss minimization under the pure monopoly
MR
P AC
Price < AC
MC
Loss
D (or price curve)
Least loss
output
MC = MR
O Q
units
14. Short-run Profits/Loss and Long Run
Equilibrium under Monopolistic
Competition
- Demand curve is highly elastic (but not
perfectly elastic) because of the presence
of relatively large number of competitors
selling close substitute products.
15. Short-run profit
MC SHORT-RUN PROFIT
AC
- Maximize its
P profits at an
output (units)
Profit
indicated by the
AC D intersection of MC
and MR
- Attract more firms
to enter the
market
MR
O
Q
16. Short-run loss
LONG-RUN PROFIT
MC - Minimize its losses
at an output
AC (units) indicated
P by the intersection
Loss of MC and MR
AC
D
MR
O
Q
17. Long-run equilibrium
AC
MC LONG-RUN
EQUILIBRIUM
- Firms just earn
P = AC normal profits
which is break-even
- This means TR = TC
D
MR
O
Q
18. Various Market Situations Facing a
Firm Under Oligopoly
-When a firm reduces its price, the other
ones also reduces their prices “PRICE
WAR”
19. (a) The demand curve of a firm which increases its
price without reaction from rivals
P
D
O Q
20. (b) The demand curve under non-collusive
oligopoly.
If the price cut (P2) is
ignored by rivals, the
P firm can sell up to Q3.
a
But if rivals also match
P1
the price cut, then the
firm can only sell up to
P2 Q2.
D
D1
O Q
Q1 Q2 Q3
21. (c) Price reduction
PRICE REDUCTION
P from the current
market price does not
only twist(kink) the
demand curve but also
the MR curve which is a
P1 vertical twist.
D
MR
O Q
Q1
22. (d) The equilibrium price under non-collusive
oligopoly
- The most profitable
P output is Q1 and
remains the most
profitable output.
- The most profitable
MC price is P1. Any shift
P1 in MC within the
vertical segment of
MR does not change
either price or
output
D
O Q
Q1 MR
23. (e) Profit maximization of a firm under collusive
oligopoly
Oligopolists agree
P together with respect
MC to both price and
production in order to
gain maximum profits.
AC
P1
Economic Profit
D
MR
O Q
Q1
