Quiz graphing 1 Draw a monopoly making a

Quiz graphing 1. Draw a monopoly making a supernormal profit. 2. Draw a perfectly competitive firm making a subnormal profit. 3. Draw a monopoly making a normal profit. 4. Draw a perfectly competitive firm making a supernormal profit. 5. Draw a monopoly making a subnormal profit.

Profit maximisation • Always determine quantity from MR=MC • Why • Because the distance between TR and TC is the greatest so the profit is largest or loss smallest. • If a firm is not profit maximising at MR=MC then MR > MC or MR<MC occurs.

Changing the quantity to ensure profit maximisation • MR > MC • MR<MC • If marginal revenue is • If Marginal revenue is larger than Marginal less than Marginal cost the quantity must be be increased so that MR decreases or MC increases until they are decreases until they are equal. • If a PC firm the MC will increase until MR=MC decrease until MR=MC as MR is constant.

Review graphing – find MR=MC to get quantity sold only

Profits – based on placement of AC • • AR= AC is a normal profit AR > AC is a supernormal profit AR< AC is a subnormal profit Remember to use the quantity determined by MR=MC to determine the shading for profits not the technical optimum point where MC cuts AC at the lowest point.

Monopoly and Pricing • Imperfect firms do not face as much competition from other firms which means the product will have a Mark-up on the price. • Therefore P > MC and so the quantity will be determined by MR=MC but the price will be determined from the Average Revenue curve