Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
    1. DragIT - fixed cost curve
    2. DragIT - variable cost curve
    3. DragIT -cost curves
    4. Step-by-step - Short-run total cost curve
    5. DragIT -revenue curve
    6. DragIT - Revenue curves (1)
    7. DragIT - Revenue curves (2)
    8. PlotIT - Profit maximisation
    9. DragIT - Perfect competition
    10. Step-by-step - perfect competition, short-run supernormal profit
    11. Step-by-step - perfect competition, short-run losses
    12. Step-by-step - perfect competition, firm and industry
    13. DragIT - Monopoly (1)
    14. DragIT - Monopoly (2)
    15. Step-by-step - monopoly
    16. DragIT - Welfare loss under monopoly
    17. Step-by-step - monopolistic competition, short-run
    18. Step-by-step - monopolistic competition, short-run
22. Print View

PlotIT - Profit maximisation

As we saw earlier, profit maximisation will occur for a firm where MC=MR. The following diagram shows the costs and revenues for a product Y over a range of output from zero to 80 units per week. Product Y is one of many products produced by the firm. The fixed costs associated with producing Y are £120 per week, £60 of which is normal profit.

What happens when the demand for a firm's product changes? How will this affect the profit maximising price and output? The following diagram is the same as the one above. It shows the cost and revenue curves for firm X in the production of good Y.

Now assume that a close competitor of product Y has dropped the price of its product. As a result demand for product Y changes by 15 units per week.

In the diagram below, click on the two points in turn where the new AR curve strikes the axes. Then do the same for the MR curve.

You may like to check your answer.

1

Shift in demand Given the drop in demand faced by the firm, what is the new equilibrium profit maximising output and price? How much profit is the firm making at this equilibrium? The new equilibrium output will be at 25 units (where MR = MC - profit maximising).The equilibrium price will be £12.00. At this equilibrium, the firm will be making just normal profit, since AR = AC. In other words, supernormal profit is zero.