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PRINCIPLES OF
MICROECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint® Slides
by Ron Cronovich
TR
Average revenue (AR) AR = =P
Q
Q P TR AR MR
0 $10 n.a.
1 $10 $10
2 $10
3 $10
4 $10 $40
$10
5 $10 $50
6
ACTIVE LEARNING 1:
Answers
Fill in the empty spaces of the table.
TR ∆TR
Q P TR = P x Q AR = MR =
Q ∆Q
0 $10 $0 n.a.
$10
1 $10 $10 $10
Notice that $10
2 $10 $20 $10
MR = P $10
3 $10 $30 $10
$10
4 $10 $40 $10
$10
5 $10 $50 $10
7
MR = P for a Competitive Firm
A competitive firm can keep increasing its output
without affecting the market price.
So, each one-unit increase in Q causes revenue
to rise by P, i.e., MR = P.
Q TR TC Profit MR MC
∆ Profit =
At any Q with MR – MC
MR > MC,
0 $0 $5 –$5
increasing Q $10 $4 $6
raises profit. 1 10 9 1
10 6 4
2 20 15 5
At any Q with 10 8 2
MR < MC, 3 30 23 7
10 10 0
reducing Q 4 40 33 7
raises profit. 10 12 –2
5 50 45 5
At Q1, MC = MR.
Changing Q Q
would lower profit. Qa Q1 Qb
The firm’s SR
supply curve is Costs
the portion of MC
its MC curve
If P > AVC, then
above AVC.
firm produces Q ATC
where P = MC.
AVC
The firm’s
Costs
LR supply curve
is the portion of MC
its MC curve
above LRATC. LRATC
20
ACTIVE LEARNING 2A:
Answers
A competitive firm
Costs, P
profit per unit MC
P = $10 MR
= P – ATC ATC
= $10 – 6 profit
= $4 $6
Total profit
= (P – ATC) x Q
= $4 x 50 Q
50
= $200
21
ACTIVE LEARNING 2B:
Identifying a firm’s loss
A competitive firm
Determine Costs, P
this firm’s
MC
total loss.
Identify the ATC
area on the
graph that $5
represents
P = $3 MR
the firm’s
loss.
Q
30
22
ACTIVE LEARNING 2B:
Answers
A competitive firm
Costs, P
MC
Total loss
= (ATC – P) x Q
= $2 x 30 ATC
= $60
$5
loss loss per unit = $2
P = $3 MR
Q
30
23
Market Supply: Assumptions
1) All existing firms and potential entrants have
identical costs.
2) Each firm’s costs do not change as other firms
enter or exit the market.
3) The number of firms in the market is
• fixed in the short run
(due to fixed costs)
• variable in the long run
(due to free entry and exit)
P2 P2
AVC
P1 P1
Q Q
10 20 30 (firm) (market)
LRATC
P=
long-run
min. supply
ATC
Q Q
(firm) (market)
CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 30
Why Do Firms Stay in Business if Profit =
0?
Recall, economic profit is revenue minus all
costs – including implicit costs, like the
opportunity cost of the owner’s time and money.
In the zero-profit equilibrium, firms earn enough
revenue to cover these costs.
S2
Profit ATC B
P2 P2
A C long-run
P1 P1 supply
D2
D1
Q Q
(firm) Q1 Q2 Q3 (market)
CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 32
Why the LR Supply Curve Might Slope
Upward
The LR market supply curve is horizontal if
1) all firms have identical costs, and
2) costs do not change as other firms enter or
exit the market.
If either of these assumptions is not true,
then LR supply curve slopes upward.
Costs, P
MC
revenue per unit = P MR
profit per unit = P – ATC profit ATC
cost per unit = ATC
Q
Q
profit-maximizing quantity
CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 38
A Firm With Losses
Costs, P
MC
ATC
Q
Q
loss-minimizing quantity
CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 39