9.2

• In a perfectly competitive market, firms aim to maximise profit by determining how much to produce. They use the marginal condition (MC = MR) to make this decision.
• • Marginal Revenue (MR) is the additional revenue a firm earns from selling one more unit of output.
  • Marginal Cost (MC) is the additional cost incurred to produce one more unit of output.
• For a perfectly competitive firm, price (P) = MR. The firm will produce at the quantity where MC = P.
• If the marginal cost of producing an additional unit is lower than the price, the firm will continue to produce. But as soon as the marginal cost exceeds the price, the firm should stop producing additional units.
• The short-run supply curve shows how much output a firm will produce at different prices, given its costs. The firm chooses its output level by comparing price (P) with marginal cost (MC).
• SMC (Short-run Marginal Cost): This curve shows the additional cost of producing each extra unit. It increases as more is produced, representing diminishing returns.
• SATC (Short-run Average Total Cost): This curve shows the average total cost (including fixed and variable costs) per unit of output.
• SAVC (Short-run Average Variable Cost): This curve shows the average variable cost of producing each unit, excluding fixed costs.
• The short-run supply curve of the firm is the portion of the MC curve that lies above the SAVC curve. Below this point, the firm would rather shut down than continue operating.
• In the long run, firms can enter or exit the market, and all costs are variable. The firm’s goal in the long run is to produce where P = MC = minimum LAC (Long-run Average Cost)
• LMC (Long-run Marginal Cost): Shows the additional cost of producing each extra unit when all inputs are variable.
• • LAC (Long-run Average Cost): Shows the average cost of producing at different output levels when all inputs are flexible.
• The long-run supply curve is the part of the LMC curve above the minimum point of the LAC curve. Below this point, firms will exit the industry because they are not covering their costs.
• In a perfectly competitive market, firms will enter if they see economic profits and exit if they incur economic losses. Entry and exit ensure that firms make normal profits in the long run.
• Market Graph: shows the overall market with market supply and demand curves.
• Single Firm’s Graph:

  • shows the individual firm's cost curves and the price/output relationship.
• Efficiency in Perfect Competition:

  • allocative efficiency
  • productive efficiency
  • economic profits in the long run
• Allocative Efficiency:

  • Occurs when P = MC. This means that the price consumers are willing to pay for the last unit is exactly equal to the cost of producing that unit. No resources are wasted.
• Productive Efficiency:

  • Occurs when firms produce at the minimum point of the LAC curve. This means firms are producing goods in the least costly way, using the fewest resources.
• Economic Profits in the Long Run:

  • In the long run, all firms in a perfectly competitive market will make zero economic profit. This means they are covering all costs, including opportunity costs, but are not earning any extra profit above that.
• • Firms produce where MC = MR (P), and the portion of the MC curve above the SAVC is the firm’s short-run supply curve.
  • If price falls below the shutdown point (SAVC), the firm will cease production in the short run.
• • In the long run, firms produce where MC = LAC, and the part of the LMC curve above the LAC minimum is the firm’s long-run supply curve.
  • Below the exit price, firms will exit the industry in the long run.
• In the long run, entry and exit of firms ensure that all firms make normal profits, where P = LAC and no firm earns economic profit.