Primary Deck
© 2015 Pearson Canada Inc. Chapter 9A Slide 1
MARGINAL REVENUE AND PRICE
The demand curve for an individual pricetaking business in perfect competition is
also a marginal revenue curve — a
horizontal line at the market price.
© 2015 Pearson Canada Inc. Chapter 9A Slide 2
MARGINAL REVENUE AND PRICE
• In the market structure of perfect competition,
each small, identical business is a price-taker
– Because each business can sell as much
output as it can produce at the market price,
there is no need to lower price to sell more
– Marginal revenue equals price
– Each business’s individual demand curve —
a horizontal line at the market price —
is also its marginal revenue curve
© 2015 Pearson Canada Inc. Chapter 9A Slide 3
Perfect Competition: Industry and
Fig. 9A.1
Individual Business Demand and Price
a) Wheat Industry
© 2015 Pearson Canada Inc. Chapter 9A Slide 4
b) Individual Wheat Farmer
COSTS AND DIMINISHING
MARGINAL PRODUCTIVITY
Because of diminishing marginal productivity,
marginal costs increase as output increases,
and the average total cost curve is U-shaped.
© 2015 Pearson Canada Inc. Chapter 9A Slide 5
COSTS AND DIMINISHING
MARGINAL PRODUCTIVITY
• A business’s Total Cost =
Total Fixed Costs + Total Variable Costs
– Fixed costs — do not change with quantity of
output produced; include normal profits
(compensation for a business owner’s time
and money – average profits in all industries)
– Variable costs
change with changes in the quantity of
output produced
© 2015 Pearson Canada Inc. Chapter 9A Slide 6
• Total Product
total output labour produces when working with
all fixed inputs
– Marginal product
additional output from hiring one more unit of
labour
– Diminishing marginal productivity
as you add more of a variable input to fixed
inputs, the marginal product of the variable
input eventually diminishes
© 2015 Pearson Canada Inc. Chapter 9A Slide 7
Fig. 9A.2
Total Product
and
Marginal Product
© 2015 Pearson Canada Inc. Chapter 9A Slide 8
Fig. 9A.2b
Marginal Product
© 2015 Pearson Canada Inc. Chapter 9A Slide 9
• As more labourers produce more output,
diminishing marginal productivity increases
marginal costs (MC )
– The marginal cost curve slopes upward to
the right
– Marginal cost can be calculated as the
change in total
– Cost of producing an additional unit of
output
© 2015 Pearson Canada Inc. Chapter 9A Slide 10
Fig. 9A.3 Increasing Marginal Cost
© 2015 Pearson Canada Inc. Chapter 9A Slide 11
• Average Total Cost (ATC)
total costs per unit of output
– Total costs divided by quantity
– ATC curve is U-shaped —
as output increases, ATC first decreases,
then increases
– Where MC is less than ATC, ATC is
decreasing
– Where MC is greater than ATC, ATC is
increasing
– Where MC equals ATC (MC and ATC curve
intersect), ATC is at its minimum
© 2015 Pearson Canada Inc. Chapter 9A Slide 12
Fig. 9A.4
Marginal Costs & Average Total Costs
Table
© 2015 Pearson Canada Inc. Chapter 9A Slide 13
Fig. 9A.4
Marginal Costs & Average Total Costs
Graph
© 2015 Pearson Canada Inc. Chapter 9A Slide 14
MARGINAL COST CURVE DETERMINES
THE SUPPLY CURVE
The marginal cost curve determines the supply curve
for businesses in perfect competition.
© 2015 Pearson Canada Inc. Chapter 9A Slide 15
MARGINAL COST CURVE DETERMINES
THE SUPPLY CURVE
• Recipe for profits in perfect competition is to find
the highest quantity for which marginal revenue
(MR) is greater than marginal costs (MC)
– If MR = MC,
the business earns maximum total profits
– If MR > MC,
the business increases quantity of output to
increase profits
– If MR < MC,
the business decreases quantity of output to
increase profits
© 2015 Pearson Canada Inc. Chapter 9A Slide 16
Fig. 9A.5a
Smart Quantity Choice for
Economic Profits when Price = $4
© 2015 Pearson Canada Inc. Chapter 9A Slide 17
Fig. 9A.5b
Smart Quantity Choice for
Economics Profits with Different Prices
© 2015 Pearson Canada Inc. Chapter 9A Slide 18
Fig. 9A.7 Market Supply of Wheat with 1000 Farmers
© 2015 Pearson Canada Inc. Chapter 9A Slide 19
• Law of Supply
if the price of a product or service rises, the
quantity supplies increases. Three reasons why
higher prices create incentives for increased
quantity supplied
– Higher prices necessary to cover increasing
marginal opportunity costs that arise because
inputs not equally productive in all activities
– Higher prices bring higher profits, whether
marginal costs are increasing or constant
– Higher prices necessary to cover increasing
marginal costs from diminishing marginal
productivity
© 2015 Pearson Canada Inc. Chapter 9A Slide 20
SHORT-RUN AND LONG-RUN EQUILIBRIUM
Economic losses and profits are signals for
businesses to exit or enter an industry, shifting
industry supply and returning the industry to longrun equilibrium, where economic profits are zero
and average total costs are at a minimum.
© 2015 Pearson Canada Inc. Chapter 9A Slide 21
SHORT-RUN AND LONG-RUN EQUILIBRIUM
• The marginal cost and marginal revenue curves
are most important for finding a business’s shortrun equilibrium — the quantity of output yielding
maximum total profits. Economic profits may be
positive or negative (economic losses) in shortrun equilibrium.
• The average total cost (ATC) curve is most
important for finding a business’s long-run
equilibrium, where economic profits are zero
• Economic profits (or losses) per unit
= Price – ATC
© 2015 Pearson Canada Inc. Chapter 9A Slide 22
• Three economic profit scenarios
– Scenario One
Economic losses are red lights,
signalling businesses to exit an
industry, decreasing industry
supply. Market price rises,
businesses keep exiting, and
industry supply keeps shifting
leftward until price rises to equal
ATC, covering all opportunity
costs of production.
© 2015 Pearson Canada Inc. Chapter 9A Slide 23
Fig. 9A.8
Scenario One – Economic Losses
© 2015 Pearson Canada Inc. Chapter 9A Slide 24
– Scenario Two
The breakeven point for a
business is the price and
quantity combination with zero
economic profits. This is a
yellow light, signalling
businesses are breaking even
and just earning normal
profits. The is no incentive for
businesses to exit or enter the
industry, and no change in
industry supply.
© 2015 Pearson Canada Inc. Chapter 9A Slide 25
Fig. 9A.9
Scenario Two – Breakeven Point
© 2015 Pearson Canada Inc. Chapter 9A Slide 26
– Scenario Three
Economic profits are green
lights, signalling businesses to
enter an industry, increasing
industry supply. Market price
falls, businesses keep entering,
and industry supply keeps
shifting rightward until price
falls to just equal ATC, covering
all opportunity costs of
production.
© 2015 Pearson Canada Inc. Chapter 9A Slide 27
Fig. 9A.10
Scenario Three – Economic Profits
© 2015 Pearson Canada Inc. Chapter 9A Slide 28
• In long-run equilibrium, each business is
producing efficiently, at the lowest possible
average total cost
• Economic profits and losses act as an invisible
hand, directing business owner’s interest in
profits so that the market produces the products
and services that consumers value the most
© 2015 Pearson Canada Inc. Chapter 9A Slide 29
Fig.
9A.11a
Short-Run and Long-Run Market
Equilibrium in the Wheat Industry
© 2015 Pearson Canada Inc. Chapter 9A Slide 30
Fig.
9A.11b
Short-Run and Long-Run Market
Equilibrium in the Wheat Industry
© 2015 Pearson Canada Inc. Chapter 9A Slide 31
Fig.
9A.11c
Short-Run and Long-Run Market
Equilibrium in the Wheat Industry
© 2015 Pearson Canada Inc. Chapter 9A Slide 32
© 2015 Pearson Canada Inc. Chapter 9A Slide 33
Secondary
Deck
Alternate Graph Slides
© 2015 Pearson Canada Inc. Chapter 9A Slide 34
Fig. 9A.6 Individual Farmer’s Supply of Wheat
© 2015 Pearson Canada Inc. Chapter 9A Slide 35
Fig. 9A.4
Marginal Costs and Average Total Costs
© 2015 Pearson Canada Inc. Chapter 9A Slide 36
Fig. 9A.11
a)
Short-Run and Long-Run Market
Equilibrium in the Wheat Industry
Economic
Losses
© 2015 Pearson Canada Inc. Chapter 9A Slide 37
b)
Breakeven Zero
Economic Profits
c)
Economic
Profits
Refresh Questions
© 2015 Pearson Canada Inc. Chapter 9A Slide 38
Refresh 9A.1
1. Explain in your own words why marginal
revenue and price are equal for a small
business in perfect competition.
2. Identify another industry that fits the
description of perfect competition. Explain
your choice.
© 2015 Pearson Canada Inc. Chapter 9A Slide 39
Refresh 9A.1
3. Starting from perfect competition, what
changes in an industry would cause price to
be unequal to marginal revenue?
© 2015 Pearson Canada Inc. Chapter 9A Slide 40
Refresh 9A.2
1. In your own words, explain diminishing
marginal productivity.
2. Explain how diminishing marginal productivity
causes the average total cost curve to be Ushaped.
[Hint: Your explanation needs to include
marginal cost.]
© 2015 Pearson Canada Inc. Chapter 9A Slide 41
Refresh 9A.2
3. How do you know that the marginal cost curve
intersects the average total cost curve at the
minimum point of the average total cost curve?
© 2015 Pearson Canada Inc. Chapter 9A Slide 42
Refresh 9A.3
1. In your own words, explain the three reasons
why higher prices create incentives for
businesses to increase quantity supplied.
2. Explain why the marginal cost curve is also
the supply curve for businesses in perfect
competition.
© 2015 Pearson Canada Inc. Chapter 9A Slide 43
Refresh 9A.3
3. If the market price of wheat falls from $5 to $4
per bushel, calculate the change in the
farmer’s quantity supplied decision. Explain
why the farmer makes that change.
© 2015 Pearson Canada Inc. Chapter 9A Slide 44
Refresh 9A.4
1. Which of the three scenarios would cause
businesses to enter an industry? Explain why
that increase in the number of businesses in an
industry causes the market supply curve to shift
rightward.
2. In Figure 9A.9, explain why the breakeven point
is a market price of $4 per bushel and an output
of 1200 bushels.
© 2015 Pearson Canada Inc. Chapter 9A Slide 45
Refresh 9A.4
3. The paper clip industry is perfectly competitive
and is initially in long-run equilibrium. Then the
demand for paper clips decreases because
people are using tablets and less paper. Using
one graph for the paper clip industry and one
graph for an individual business like Figures
9A.11a and 9A.8, (remember to title your
graphs), tell the story of what will happen to
market price, economic profits or losses, and
the adjustment to a new long-run equilibrium.
© 2015 Pearson Canada Inc. Chapter 9A Slide 46