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Short-run equilibrium of industry and firm under perfect competition
- Firms will join the market attracted by the abnormal profits
Price Cost / Revenue
S MC AC
Pe D = AR
AR
AC = MR
D
O Quantity O Qe Output
Q (millions) Q (thousands)
(a) Industry (b) Firm…read more

Slide 3

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Loss minimising under perfect competition
- as there is few barriers to entry firms will leave the market if it is
making a loss. Supply will shift left.
Price Cost / Revenue
MC AC
S
AC
D1 = AR1
P1 AR1
= MR1
D
O Quantity O Qe Output
Q (millions) Q (thousands)
(a) Industry (b) Firm…read more

Slide 4

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Long-run equilibrium under perfect competition
­ Firms will neither join or leave the market.
Price
Cost / Revenue
MC
Se
LRAC
PL ARL DL
D
O Quantity
O QL Output
Q (millions) Q (thousands)
(a) Industry (b) Firm…read more

Slide 5

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Profit maximising under monopoly
Cost /
Rev MC
Abnormal profit
AC
AR This is the short run and
long equilibrium position
of a firm in monopoly. It is
difficult for firms to enter
the market due to the
AC high barriers to entry.
AR
MR
O Qm Output…read more

Slide 6

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This is the equilibrium position of
a firm in an oligopoly. If a firm
Cost /
Oligopoly raise their price above P1 others
wont follow as customers will
MC switch to the cheaper good,
Revenue therefore demand is relatively
price elastic (i.e. responsive to
SUPERNORMAL PROFITS this change). If a firm lowers price
below P1 other firms will follow
as they will be afraid of losing
customers. This means that
because all prices are similar ­
D (AR) = elastic the demand curve at this point
will be relatively price inelastic.
Firms are reluctant to do this as it
AR LRAC may lead to price wars and all
(p1) firms will end up being less well
off. This theory explains PRICE
RIGIDITY in an oligopolist market.
Note, because there is effectively
two AR (D) curves there is
AC effectively two MR curves which
Kinked D Curve leads to a discontinuity in the MR
(p2)
curve.
D (AR) = Inelastic
Output
MR Curve…read more

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