CHAPTER 7: DETERMINANT

OF OUTPUT LEVEL AND

MARKET PRICE STRUCTURE
BY : PN. SARATULL NOR NATASHA BINTI SAFRI
JABATAN PERDAGANGAN
POLITEKNIK MERSING

SHORT RUN IN PC MARKET

Each firm will strive to maximize profits, but this does
NOT necessarily mean that the firm will always
generate profits.
Its dependent on the firms average revenue (AR) and
average cost (AC).
MC=MR only determines that a firm will MAXIMIZE
its profits or MINIMIZE its loses but does not
indicate the type of profit or loss of the firm.

FIRMS ACTIVITIES WILL CAUSE :

Generate supernormal profit or positive
economic profit. (TR > TC )
Generate normal profit or ZERO economic
profit or break even. ( MC=MR)
Generate subnormal profit or negative
economic profit or economic loss. ( TC > TR )
Stop operating and shut down. (TR < TVC )

LONG RUN IN PC MARKET

Occurs in two conditions :
1.Generates normal profit. (MR=MC)
To generates supernormal profit, firm need to decrease it
supply.
To generates subnormal profits, firm need to increase it
supply.

1.Stop operating and shuts down. (AC>AR)

- Minimum condition to continue operating is P must equal to
LAC.

MERITS AND DEMERITS OF A PC

MARKET

MERITS

1. Allocative efficiency
2. Long run productive efficiency
3. Cost savings

1.

Does not encourage R&D

2.

Limited consumers choice

3.

Social costs

DEMERITS

Q&A