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Main content
Current time:0:00Total duration:6:54
AP.MICRO:
PRD‑3 (EU)
,
PRD‑3.A (LO)
,
PRD‑3.A.1 (EK)
,
PRD‑3.A.3 (EK)

Video transcript

there's a type of question that you might see on an AP economics exam and it's talking about perfectly competitive markets so it says a typical profit-maximizing firm in a perfectly competitive constant cost industry is earning a positive economic profit so the first question they ask us is is the market price greater than less than or equal to the firm's price explained so pause this video and see if you can answer this on your own before we do it together all right now let's do it together so remember we are talking about a perfectly competitive market so in a perfectly competitive market all of the players in that market have to be price takers they have no pricing power so the market price has to be equal to the firm's price so market market price equal equal to firm price firm price because in perfectly perfectly competitive market market firms are price takers firms are price takers they have no pricing power all right Part B draw correctly labelled side by side graphs for both the market and a typical firm and show each of the following and then it'll ask us to do a bunch of stuff here so once again pause this video and actually came out paper this will be very valuable for you to have a go at this all right so let's see we wanted to these side-by-side graphs and we want to think about the market and the firm and we've done this in multiple videos before so let's think about what they're talking about it is so this is the market right over here that's the market and this is on this axis is going to be price on this axis is going to be quantity and then let me do a similar thing for a firm here so that would be the firm's price axis price and then this would be quantity for the firm quantity let make it clear this is the market and then this right over here is the firm and let's see they say market price and quantity so the equilibrium price and quantity in the market so we could draw the supply curve for the market it might look something like this upward sloping we've seen that multiple times we could do the demand curve for the market it would look something like that and then we have the equilibrium price in the market which they want us to use P sub m so P sub m and then we have the equilibrium quantity in the market which they want us to use q sub M so we've done this first part all right now let's see what else they want the firm's quantity labeled Q sub F the firm's average revenue curve labeled a are the firm's average total cost curve labeled ATC the area representing total cost shaded completely so in order to this first part the quantity that it would be rational for this profit seeking firm or the profit-maximizing firm to produce to think about that we actually also have to think about the firm's average revenue and the average revenue which is going to be the same thing as the demand curve for that firm it's going to be based on this market price remember the firm in this perfectly competitive market has to be a price taker so this horizontal line right over there that is the firm's average revenue aar which is equal to its marginal revenue which is equal to its demand curve which is equal to this market price and the quantity that it's rational for this firm to produce is where this marginal revenue curve which is also the average revenue curve in this case intersects our marginal cost curve so the marginal cost curve might look something something like this so marginal cost and so this right over here is our Q sub F so we've done this part and this part the firm's average total cost curve well the average total cost this quantity needs to be below the marginal revenue in the average revenue that quantity because we know that the firm is earning a positive economic profit so we are dealing with a situation that likely looks like this so the average total cost might look something like this and I drew it that way to ensure that at this quantity Q sub F our marginal revenue and our average revenue is above our average total cost that tells us that we're earning economic profit in this situation so I've done part for the area representing total cost shaded completely well the area representing total cost would be the cost per unit the average cost per unit which is that much times the total number of units and the total number of units is is going to be this length which is equal to Q sub F and so your total cost is going to be this shaded area if there are asking us our total economic profit then we would be talking about this area up here but they're not they're talking about our total cost which is this area right over there so we have done those parts now let's go to Part C if one firm in the market were to raise its price what would happen to its total revenue explained pause this video see if you can answer that well remember we're dealing with a perfectly competitive market a perfectly competitive industry there's no differentiation between anyone's products so if all of a sudden someone were to stick their head out and try to raise price no one would buy their product anymore because people can get identical products from other people for a lower price and so its total revenue its total revenue would go to zero since product is undifferentiated differentiated and consumers could buy from others at lower price at lower price and as another this is another way to think about it that you know they have to be price takers in a perfectly competitive market
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