1. ECON111
Tutorial 10
Week 12

2. Question 1.a
Explain why the demand curve in a perfectly competitive market is downward sloping, while the demand curve of an individual firm in a perfectly competitive market is perfectly elastic?

3. 1. The intersection of the market supply and the market demand curve…
3. The typical firm can sell all it wants at the market price…
Ounces of Gold per Day
Price per Ounce
Market
Ounces of Gold per Day
Price per Ounce
Firm S
$400
$400
Demand Curve Facing the Firm D
2. determine the equilibrium market price
4. so it faces a horizontal demand curve

4. Question 1.b Total revenue is a straight line up to the right.
Its slope is constant – it is a straight line – because marginal revenue is constant.
Marginal revenue is constant under perfect competition because additional units can be sold at a constant price
P = $125 Q
TR = P x Q MR 1
125 2
250 3
375 4
500 5
625 6
750 7
875 8
1000 9
1125 10
1250 TR Q

5. Profit Determination Using Total Cost and Revenue Curves
Question 1.c
Profit Determination Using Total Cost and Revenue Curves TC TR
Total cost, revenue
$385
350
315
280
245
210
175
140
105 70 35
Quantity 1 2 3 4 5 6 7 8 9
Maximum profit =$81
$130
Loss
Profit
Profit is maximized where the vertical distance between total revenue and total cost is greatest.
At that output, MR (the slope of the total revenue curve) and MC (the slope of the total cost curve) are equal

6. Question 2.a Market equilibrium Qd = Qs When P = $8.4
Individual Firm
(1,000 firms) P
Q demanded
Q produced MC
AVC
ATC
3.65
500,000
200
6.40
7.80
12.80
5.20
450,000
250
7.00
11.00
6.80
400,000
300
7.65
7.10
10.43
8.40
350,000
350
7.20
10.06
10.00
300,000
400
7.50
11.60
250,000
450
12.40
8.00
10.22
13.20
200,000
500
20.70
9.00
Market equilibrium Qd = Qs
When P = $8.4
Qd = 350,000 boxes
Qs = 350 X 1,000 = 350,000 boxes

7. Market equilibrium Qd = Qs
When P = $8.4
Qd = 350,000 boxes
Qs = 350 X 1,000 = 350,000 boxes

8. Question 2.b When P = $8.4 per box AVC = $7.20 ATC = $10.06 P > AVC
Firm can cover fixed costs and some variable costs
P < ATC
Firm incurs an economic loss
Loss per unit
ATC – P = $ $8.4 = $1.66
Total loss
(ATC – P) × Q = $1.66 × 350 = $581

9. Question 2.c, d
In the long run some firms exit the market because they are incurring an economic loss, as such P = ATC.
When P = ATC, P = $10
Qd = 300,000 boxes
While each firm produces 400 boxes
So there are 300,000/400 = 750 firms in the market (industry)
Market
Individual Firm P
Q demanded
Q produced MC
AVC
ATC
3.65
500,000
200
6.40
7.80
12.80
5.20
450,000
250
7.00
11.00
6.80
400,000
300
7.65
7.10
10.43
8.40
350,000
350
7.20
10.06
10.00
300,000
400
7.50
11.60
250,000
450
12.40
8.00
10.22
13.20
200,000
500
20.70
9.00

10. Question 3
Explain and illustrate graphically how the growing world population is influencing the world market for wheat and a representative individual wheat farmer.
Increase in world population increases the market demand for wheat.
The price of wheat increases and, hence, existing farmers make an economic profit
This attracts entry by new farmers which increases supply, lower the price, and eliminate economic profit.

11. A B C
Initial equilibrium is at A, demand and supply are D0 and S0, where P = $4, Q = 15,000,000
As world population increases, the market demand increases, the demand shifts right to D1
At B, the price increases to P = 5, hence MR = P increases from MR0 to MR1
Each firms responds by increasing output to Q = 225,000
Now, firms are making economic profit since P > ATC
Economic profit attracts entry by new firms, leading to an increase in supply, from S1 to S1
Hence, at C, the market price falls back to the initial price P = $4, MR falls back to MR0
each produces Q = 200,000
The market equilibrium quantity is Q = 25,000,000
The firms now make zero economic profit and there is no longer an incentive for new entry.