DEPARTMENT: BUSINESS ADMINISTRATION

COURSE: (BUAD 104) PRINCIPLES OF ECONOMICS

TITLE: ASSIGNMENT (GROUP 5)

DATE: 30/04/2024

MEMBERS IN GROUP 5

NAMADI HAMZA – U22DLBA10354

FRANCIS PHILIP ZATUNG – U22DLBA10283
ABBA LAWAN MUHAMMAD – U22DLBA10287
MUHAMMAD NAJEEB SANI – U22DLBA10262
SALAMATU USMAN – U22DLBA10309
UCHECHI IDIKA COVENANT – U22DLBA10310
HADIZA ABDULLAHI MAIKUDI. U22DLBA10282
ADEEF UMAR U20DLBA10056
MUHAMMAD HARIS KARAI. U20DLBA10066

QUESTIONS
5 (a) In short run under a perfectly competitive market, explain the relationship between the
average cost, average variable cost, marginal revenue and demand curve.
(b) Explain the long run profit maximazation.

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INTRODUCTON
A perfectly competitive market is an ideal market distinguished by many independent buyers and
sellers of identical products and services with static prices due to minimal entry barriers and
higher competition. As this type of market exists in theory, it acts as a model to examine the
supply and demand in an ideal market.

5 (a) In a perfectly competitive market in the short run, the relationship between average cost
(AC), average variable cost (AVC), marginal revenue (MR), and the demand curve for an
individual firm can be explained as follows:
Demand Curve for the Firm: Each firm in a perfectly competitive market is a price taker. This
means that the price of the product is determined by the market based on overall supply and
demand. The demand curve that each firm faces is therefore horizontal at the market price. This
horizontal line is also the marginal revenue (MR) curve for the firm because every additional unit
of output sold earns the firm the same market price. Thus, MR equals price (P).
Marginal Revenue (MR) and Price: Since the firm can sell as much as it wants at the market
price, the MR curve is identical to the demand curve, and both are horizontal at the prevailing
market price.
Average Cost (AC) and Average Variable Cost (AVC): The average cost curve shows the cost
per unit at different levels of output, including both fixed and variable costs. The average
variable cost curve shows the variable cost per unit at different levels of output, excluding fixed
costs. Typically, both AC and AVC curves are U-shaped, with AVC always lying below AC
because AC includes additional fixed costs.
Profit Maximization: A firm maximizes profit where marginal cost (MC) equals marginal
revenue (MR). Since MR is constant and equal to the market price, the firm will increase output
until MC equals P. The MC curve typically intersects the AVC and AC curves at their minimum
points, reflecting the most efficient scale of production in the short run.
Economic Decisions:
If P > AC at the profit-maximizing output, the firm makes a profit.
If P = AC, the firm breaks even, covering all its costs including a normal return on investment
(no economic profit).

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If P < AC but P > AVC, the firm should continue to produce in the short run because it covers its
variable costs and contributes something towards fixed costs, reducing losses.
If P < AVC, the firm minimizes its losses by not producing any output at all, because it would
not even cover variable costs.
In summary, in a perfectly competitive market in the short run, the firm faces a horizontal
demand curve at the market price, which equals MR. The firm's decisions on output depend on
how this market price compares to its AC and AVC. The intersection points of MR with the MC
curve guide the firm's output decisions to maximize profit or minimize losses, reflecting the
critical relationships among AC, AVC, MR, and the demand curve.

(b) The concept of long-run profit maximization refers to a firm's goal to achieve the highest
possible profits over an extended period, rather than focusing merely on short-term gains. In the
long run, all factors of production are variable, meaning the firm can adjust all inputs, such as
labor and capital, to optimize operations. Here are the key aspects to understand about long-run
profit maximization:
Adjustment of Production Factors: Unlike the short run where some factors are fixed, in the
long run, a firm can adjust all inputs. This allows the firm to seek the most efficient production
scale.
Economies of Scale: As firms increase production, they may experience economies of scale,
where per-unit costs decrease as output increases. This is typically due to spreading fixed costs
over a larger number of units and operational efficiencies.
Market Entry and Exit: In the long run, firms can enter or exit markets based on profitability.
If existing firms are making profits, new firms might enter the market until the excess profit is
competed away. Similarly, if the industry is suffering losses, firms may exit, which reduces
supply and can restore equilibrium and profitability for remaining firms.
Optimal Capital Structure and Technology: In the long run, firms can change their capital
structures (debt and equity balance) and adopt new technologies that may be more cost-effective
or productive, further optimizing profits.
Price and Output Decisions: Firms will choose the price and output level that maximizes their
profits, considering the market conditions and the competitive landscape. In perfectly

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competitive markets, firms are price takers and can only adjust outputs, while in monopolistic or
oligopolistic markets; firms may have more power to set prices.
Sustainable Practices: For truly long-term profitability, firms also consider sustainability in
terms of environmental impact, social responsibility, and corporate governance. Practices that
ensure the firm’s operations are sustainable can also help in maintaining long-term profits by
securing a good reputation and customer loyalty.
Overall, long-run profit maximization involves strategic planning and the ability to adapt to
changing economic conditions, technological advances, and market dynamics to sustain
profitability over time.

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REFERENCE
Goodwin, N., Harris, J., Nelson, J. A., Roach, B., & Torras, M. (2020). Principles of economics
in context (2nd ed.). Routledge.
Triani, N. V. (2023). Perfect competition market, available at SSRN:
https://ssrn.com/abstract=4338530

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