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Mic 9
Mic 9
9
Perfect Competition
SS
RM10 RM10 P = MR = AR
DD
Quantity Quantity
Q*
Market Firm
Microeconomics All Rights Reserved
© Oxford University Press Malaysia, 2008
9– 5
PROFIT MAXIMIZATION IN A
PERFECTLY COMPETITIVE FIRM
1. Using Total approach
TOTAL REVENUE – TOTAL COST APPROACH
TC Using Graph:
TR
TR curve is a straight line
through the origin.
The maximum profit is
where the vertical
Highest vertical difference is the highest.
difference
Quantity
40
MC
Using Graph:
TR curve is a straight line
through the origin.
The maximum profit is
RM10 MR where the vertical
difference is the highest.
Quantity
40
Price is determined by the intersection of the market Firms that earn supernormal profits in
short run will only be able to earn normal
supply curve and the market demand curve.
or zero profits in long run due to entry of
newcomers.
Price (RM) Price (RM)
The economic profit MC
attracts newcomers AC
SS to the industry. As a
SS1 result, many firms
20 will enter the market 20 P = MR = AR
and this will lead to
15 an increase in
PROFIT
15 P1 = MR1 = AR1
supply.
DD
Quantity Quantity
Q* 60
Supply curve will shift to the The competitive firm sells 60 kg of
right and equilibrium market chicken and earns an economic
Market price will fall to RM15. Firm profit shown by the shaded area.
The losses in short run forces those sellers who Firms that suffer
losses in short run
cannot
Supplycover
curve their AVCtoor
will shift TVC
left andto leave the market
equilibrium can still continue
market. As many price willexit
firms risethe
to RM15
market, this will their operation. As in
The competitive
lead to a decrease in the market supply. long run they are
firm sells 60 kg of able to earn normal
chicken and or zero profits due to
Price (RM) Price (RM) suffers losses exit of the firms.
MC
shown by the
SS shaded area. AC
SS1
10 20 P = MR = AR
15
LOSSES
15 P1 = MR1 = AR1
DD
Quantity Quantity
Market Q* Firm 60