1. LEVEL 3 ECONOMICS AS3.1 Understand marginal analysis and the behaviour of firms
Understanding Economics Chapt 9, P80-99
Marginal Analysis - Equilibrium
The profit maximising
position for a PC and A
Monopolist
Equilibrium output taking a
KNOW marginal analysis approach
How to illustrate the profit
maximising position for both PC
and Monopoly
Decisions of firms using a
marginal approach when there
are price changes
UNDERSTAND
THINKING – MANAGING SELF – PARTICIPATING AND CONTRIBUTING - RELATING TO OTHERS – USING LANGUAGE, SYMBOLS and TEXT

2. A Perfect Competitor
PRICE
COST MC
REVENUE
MR
QUANTITY
Recall that a perfect competitor faces a perfectly elastic demand curve
where D = P = AR = MR (if you can’t explain why return to CHAPT 4 in
your workbook)

3. A Perfect Competitor
PRICE
COST
REVENUE
MC
MR
QUANTITY
We can now illustrate on the graph of a perfect competitor both an MC curve and an
MR curve. A PC is said to be in equilibrium when it is producing at its profit
maximising position.
RULE: where MC = MR a firm will maximise its profits
WHY

4. Think again about MARGINAL concepts
If MR is the addition to revenue when we sell one more unit and MC is the
addition to cost when we make one more unit then it follows that
MR minus MC is the addition to profit when we
produce/sell one more unit?
Example if the MR we gain from the last unit sold is $5 and that unit cost us
$4 to make then we added $1 to whatever profit we had made to that point.
If you have a question post them on the discussion group now or see me
Then if the last unit contributed an extra dollar to profit we should make
and sell a another unit because that too might contribute more to profit?
Agree?

5. Marginal Analysis
If you agree so far you will accept then that the PC should keep producing
units of output until MC = MR. That is the PROFIT MAXIMISING level of
output.
If MC < (less than) MR a PC should increase production
because there may be more profit to be added
If MC > (greater than) MR a PC should cut back production
because making these units leads to a negative marginal
profit which takes away from the profit made to that point.
THEREFORE the Profit Max point is where MR = MC.
(That is the key to understanding marginal analysis.)

6. A Perfect Competitor
PRICE
COST MC
REVENUE
Pe MR
Qmax QUANTITY
MR is equal to MC at a quantity of Qmax (another way of
saying the profit maximising quantity of output) and price Pe

7. A Perfect Competitor
PRICE
COST MC
REVENUE
Pe MR
MC1
Q1 Qmax QUANTITY
At a quantity of Q1 you will see that the P (MR) received for that unit is higher than what
the unit costs to make. Because we are talking marginal, that unit contributes to
accumulated profits to date. The PC should keep producing beyond Q1

8. A Perfect Competitor
PRICE
COST MC
REVENUE
MC2
Pe MR
Qmax Q2 QUANTITY
At a quantity of Q2 you will see that the P (MR) received for that unit is lower than what
the unit costs to make. Because we are talking marginal, that unit contributes negatively
to accumulated profits to date. The PC should lower their output below Q2

9. A Monopoly
PRICE
COST MC
REVENUE
D = P =AR
QUANTITY
MR
The same rule applies to a Monopoly. Recall the revenue curves

10. A Monopoly
PRICE
COST
REVENUE MC
Pe
D = P =AR
Qmax QUANTITY
MR
A Monopoly maximises its profit at the output quantity where MR = MC. The reason
is exactly the same as for the PC. Notice that at Qmax the dotted line runs up
through the point where MC crosses MR (where they are equal) all the way to the
demand curve. The Monopoly is in equilibrium at a combination Pe and Qmax.

11. Open an email in your own email service and answer the following
question:
Explain why a PC maximises profit at the level of
output where MR = MC. By the way, the same rule
is also true for a Monopolist.
Send your email to me at chrisbell1cb@gmail.com