Profit in Perfect Competition Market

Short-run profit in perfect competition market

In the short term, perfect competition market will have three different types of profit

such as supernormal profit, normal profit and subnormal profit.

A. Supernormal Profit

The profit maximization occurs when marginal cost equal marginal revenue at a

price of P (RM20) and quantity at Q (9 units).

The firm earns supernormal profit when average revenue (AR) is greater than

average cost (AC).

Based on above diagram, average revenue is RM20 and average cost is RM15.

So, the firm will get the supernormal profit because total revenue (RM180) is

greater than total cost (RM135).

The shaded area (EABP) is shown the profit (supernormal profit) area.

Known as economic profit; (evidence) calculation

B. Subnormal Profit 

The profit maximization occurs when marginal cost equal marginal revenue at a

price of P (RM20) and quantity at Q (9 units).

The firm earns normal profit when average revenue (AR) is equal with average

cost (AC). Price is equal at minimum AC, firm at breakeven profit.

Based on above diagram, average revenue is RM20 and average cost is also

RM20.

So, the firm will get the normal profit because total revenue (RM180) is equal

with total cost (RM180).

Known as economic profit; (evidence) calculation

B. normal Profit 

The profit maximization occurs when marginal cost equal marginal revenue at a
price of P (RM20) and quantity at Q (9 units).

The firm earns subnormal profit when average revenue (AR) is less than average
cost (AC).

Based on above diagram, average revenue is RM20 and average cost is RM25.

So, the firm will get the subnormal profit because total revenue (RM180) is less
than total cost (RM225).

The shaded area (EPAB) is shown the subnormal profit (losses) area.

Known as economic profit; (evidence) calculation

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Characteristics Perfect Competition Market

4.1       Perfect Competition Market

Perfect competition market is market in which there are a large number of buyers and sellers, buying and selling the homogenous products at certain price levels. Examples of products in perfect competition market are agricultural goods such as vegetable, fruits and others.

Characteristics  

a.                  Large number of buyers

There are many buyers in the market but they cannot control prices. Price is fixed in the market through the forces of demand and supply. No matter how much has been purchased, price is always constants. Buyers are said to be price takers.

b.                  Many sellers in the market

There are many sellers in the market. Like the buyers they too cannot control price. They are also price takers. Usually the sellers are small firms. The action of one firm will affect to others firms. Example; if the seller offers a lower price, then he will incur a loss, and if he sells at a higher price, there will be no demand. In other words, he is powerless in determining price but he can set the quantity he wants to sell.

c.                   The product are homogenous

The goods are homogenous and not differentiated. They are identical. The consumer cannot differentiate whether the goods come from producer A or B or C. Advertising is totally absent in this market.

d.                  Free entry to and exit from the market

There must be free entry to and exit from the market. If the industry is making profits, then new firms will enter the market. Otherwise, some firms will leave the market. No restriction is imposed.

e.                  Perfect knowledge

Both the consumers and the producers have perfect knowledge about the market situation. They know the current prices in all markets.

f.                    Mobility of factors of production

There must be mobility of factors of production. This means that factors of production are mobile. There are no barriers to mobility. As for land, it must have alternative uses.

g.                  No transportation cost

There must be no transportation cost. It is assumed that all firms are situated close to one another and are very close to the market.

h.                  Independence in decision making

There will be no external forces that will influence the decision of buyers and seller. They make their own decisions.

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Market Structure: Introduction

4.0       INTRODUCTION

This topic discusses all the theories about different markets. Different markets will make different decisions on the determination of quantities and prices. In this topic, we will discuss the characteristics of each market. We discuss how the determination of the profits in the short and long term.  

Market is an arrangement that facilitates the buying and selling of a product, service, factor of production or future commitment. Or in other words, a market is a place where the buyers and sellers meet one another to transact business.

Market structure refers to the number and distribution size of buyers and sellers in the markets of particular goods and services. Market structure divided to perfect competition, monopolistic, monopoly and oligopoly.  

Profit maximization in perfect competition market 

Market equilibrium is achieved when the marginal cost equal to marginal revenue. Price is determined based on the average revenue. Prices are fixed in perfect competition, so marginal revenue is still the same results at a price.

MR = MC

P = AR = MR

Although, in the imperfect competition such as monopolistic, monopoly and oligopoly the market equilibrium achieved when marginal revenue equal with marginal cost. Price is different based on quantity supplied.

MR = MC

P = AR

A firm in the short-run will possibly enjoy three types of profit. The possibilities are:

a.                  Supernormal profit

The profit earned when total revenue is greater than total cost. It also realized when the price is greater than average total cost. 

b.                  Subnormal profit

Economic losses are the losses incurred because the price is lower than the average total cost or when total revenue is less than total cost. 

c.                   Normal profit

Normal profit or breakeven is the profit necessary for a firm to stay in business. Normal profit is when total revenue is equal to total cost and where no profit or loss is incurred.

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PERODUA kaji keluar model sedan

Berita Harian 31 mei 2012
Oleh Che Wan Badrul Alias
2012/05/31


PERUSAHAAN Otomobil Kedua Sdn Bhd (PERODUA) sedang mengkaji kemungkinan untuk mengeluarkan model sedan pertamanya tidak lama lagi.

Model berkenaan dijangka menerapkan beberapa elemen daripada model prototaip, Bezza yang sebelum ini diperkenalkan kepada umum ketika Pameran Motor Antarabangsa Kuala Lumpur (KLIMS) 2010.

Pengarah Urusannya Datuk Aminar Rashid Salleh, berkata kajian itu adalah sebahagian daripada usaha PERODUA untuk memenuhi permintaan pengguna yang mahukan pengeluar kereta nasional kedua itu menambah portfolio model kenderaannya kepada sekitar empat atau lima berbanding hanya tiga pilihan ketika ini.

Katanya, syarikat amat berminat untuk membangunkan model baru sedan pada masa depan.

Namun, katanya, ia perlu mendapat kelulusan kerajaan, pemegang saham, Lembaga Pengarah dan lebih-lebih lagi Daihatsu yang terkenal dengan pengkhususannya dalam segmen kereta kompak.

“Kami sedang mengkaji semua ini kerana bukan mudah untuk membangunkan model baru itu dan kami sentiasa mengadakan perbincangan dengan pihak Daihatsu.

“Bezza adalah model konsep yang kami banggakan kerana ia membuktikan keupayaan dan kepakaran yang syarikat miliki hasil daripada kerjasama kukuh dengan rakan teknologi PERODUA.
“Namun kami sentiasa mencari jalan untuk memaksimumkan keupayaan yang kami miliki ini dalam model keluaran akan datang. Kalau kami tak boleh buat Bezza secara keseluruhan, akan ada elemen daripada model ini yang akan kami gunakan untuk keluaran model baru nanti,” katanya pada sidang media selepas memeterai memorandum pembelian sebidang tanah milik UMW Corporation Sdn Bhd di Rawang, semalam.

Hadir sama, Presiden dan Ketua Eksekutif Kumpulan UMW Corporation, Datuk Syed Hisyam Syed Wazir.

Menerusi perjanjian itu, PERODUA membeli 25.9 hektar kawasan berharga RM16.7 juta daripada UMW Corporation berhampiran lokasi ibu pejabatnya di Sungai Choh, Rawang untuk dibangunkan dengan kemudahan baru serta menambah prasarana bagi kemudahan sedia adanya.

Kemudahan baru yang dirancangnya meliputi masjid, pusat penjagaan kanak-kanak, gimnasium mini, lapangan letak kereta tambahan dan prasarana utiliti yang semuanya akan dibangunkan secara berperingkat.

Ketika ditanya sama ada UMW membenarkan PERODUA membangunkan kereta sedan, Syed Hisyam berkata, pihaknya sentiasa menyokong semua usaha yang cuba dilaksanakan untuk mengembangkan perniagaannya.

Katanya, ia termasuk cadangannya membangunkan model baru dan peruntukkan pelaburan baru kerana pihaknya amat gembira dengan prestasi yang dicapai PERODUA ketika ini.

“Sebagai pemegang saham tunggal terbesar PERODUA iaitu dengan pegangan 38 peratus, kami sentiasa menyokong perancangan pengembangan mereka lebih-lebih lagi di bawah kepimpinan Aminar Rashid yang berjaya memacu PERODUA ke tahap yang lebih tinggi,” katanya.

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economists' forum

Soal jawab ekonomi

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Revenue

Concepts of Revenue

Revenue means the sale receipt of the quantity or output produced in a firm.

a.                  Total revenue (TR)

Total revenue (TR) is the value of a firm’s sales. In other words, total revenue refers to the total amount of money that a firm can obtain from the sales of its product. The formula is shown as below:

TR = P x Q

For example, Firm JLQ sells 5000 pair of shoes at the rate of RM50.00. Firm JLQ’s total revenue is

                        TR = P x Q

                        = 50 x 5000

                        = RM250 000.00

 b.                  Average revenue (AR)

Average revenue (AR) is defined as the total revenue per unit output sold. The formula is as shown below:

AR = P

AR = TR/Q

c.                   Marginal revenue (MR)

Marginal revenue (MR) refers to the change in total revenue resulting from a one unit increase in quantity sold. Marginal revenue is equal to the change in total revenue divided by the change in output sold. The formula is as shown below:

MR = change in TR / Change in Q

d.                  Profit

Profit is the difference between the purchase price and the costs of bringing to market.

            Profit = Total Revenue (TR) – Total Cost (TC)

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Relationship between Marginal Cost (MC) and Average Cost (AC).

1. Relationship between Marginal Cost (MC) and Average Cost (AC). [based on the above picture]

2. Relationship between Marginal Cost (MC) and Average Variable Cost (AVC). [just change the "AC" to "AVC"]

Example Question : Explain the relationship between marginal cost and average cost. [6 marks]

suggestion answer:

•  Diagram 2 marks
• explanation = 4 marks

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Cost of Production

Cost of production refers to the expenses incurred by the producer in producing a particular quantity of output. There are 7 types of short-run costs:

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Law of Diminishing Marginal Returns

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Types of Production

Types of Production

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Short-run and Long-run Production

Short-run and Long-run Production

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factors of production

Factors of Production

1. Land
2. Labour
3. Capital
4. Entrepreneurship

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Definition of Production

INTRODUCTION

This topic discusses all the theories of production. This involves the use of production factors in producing the most effective level. In addition, manufacturers also need to use the correct scale to ensure that the resulting output to fulfill the law of diminishing marginal returns. In this chapter also, we will explain the relationship between cost and output. We will define the cost involved in production process, identify various types of costs and need to analyze short run costs and long run costs. At the end of this chapter, we will explain differentiate between small firm and large firm. 

Definition of production

Production means the process of using the factors of production to produce goods or services. In other words, production means the transformation of inputs into outputs.

Input is refers to those things that a firm buy for use in production process such as land, labour, capital and entrepreneur. Output is refers to what we get at the end of the production process or refers to finished goods.

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example final exam : Demand and Supply

Example of final exam questions
Section A; Multiple choice questions

1.                  A market is in equilibrium

A.                  provided there is a surplus of the product

B.                  at all process above the intersection point of the supply and demand curves

C.                  when the amount the producers want to sell is equal to the amount the consumers want to buy.

D.                 whenever the demand curve is downward sloping and the supply curve is upward sloping.

Use the following table to answer question 2 and 3

Quantity demanded (units)	Price (RM)	Quantity supplied (units)
1,000	3	700
900	6	750
800	9	800
700	12	850
600	15	900

           

2.                  Based on the data, the market will be in equilibrium if the price is

            A.         RM6.00

            B.         RM12.00

            C.         RM9.00

            D.         RM3.00

3.                  If the price RM12.00, there will be

            A.         an excess supply by 150 units.

            B.         a shortage of supply by 150 units.

            C.         an excess of demand by 850 units.

            D.         a shortage of demand by 700 units.

           

            The following figures are extracted from a supply schedule:

       

Price per unit ( RM )	Quantity supplied               (units)
4.00	1,000
5.00	1,600
6.00	2,000
7.00	2,400

4.                  When the price falls from RM6.00 to RM5.00 elasticity of supply can be expressed as:

A.         2.0                              

A.                  1.75                            

            C.         1.5

            D.         1.2

5.                  The following table refers to the demand and supply of sugar in a given market in a given period of time.

Price of sugar per kg (RM)	Demand for sugar(kg)	Supply for sugar (kg)
1	40	15
2	25	25
3	15	30
4	10	35
5	5	40

The government imposes a maximum price of RM 1 per kilogram. What is the effect of this?

A.                 the supply curve shifts to the left.

B.                 The demand curve shifts to the right.

C.                 There will be shortage of 25 kg.

D.                 There will be surplus of 15 kg. 

7.                  Raies love peanut butter. Raies heard on the news that 50%of the peanut crop in the South has been wiped out, which will cause the price to double by the end of the year. As a result

A.                  Raies is demand for peanut butter will increase by the end of the year.

B.                  Raies is demand for peanut butter increases today.

C.                  Raies is demand for peanut butter falls as he looks for a substitute good.

D.                 Raies decided to give up peanut butter completely.

8.                  If a 10 % increase in the price of sugar results in a 5 % decline in the quantity of sugar sold, the cross elasticity of demand for sugar is

A.                  2.

B.                  -2.

C.                  ½.

D.                 -1/2.

9.              If goods A and B are close substitutes

A.                  then the demand for good A will decrease when the price of good B rises.

B.                  the demand  of good A will increase when the price of good B rises.

C.                  an increase in the price of good B will decrease the demand for good A.

D.                 a change in the price of good A will not affect the demand for good B, but will affect the supply.

10.              If a decrease in income increases the demand for good, then the good is

A.                  a substitute good.

B.                  a complement good.

C.                  a normal good.

D.                 an inferior good.

121              Complementary goods are goods

            A.         that are consumed jointly.

            B.         that are consumed one in a place of the other.

C.         for which demand increase when the price of its complementary goods increase.

D.         for which demand decrease when the price of its complementary goods decrease.

12.              According to the law of supply, there is a direct relationship between quantity supplied and

            A.         the number of sellers.

B.         costs of resources.

C.         technology.

D.         the price of the  good

Section B

1.                  a.         With the aid of a diagram, discuss how a market could achieve equilibrium.                                                                                                                                 (3 marks)

b.         Explain by using appropriate diagrams, the effect on the market for Perodua’s car in each of the following cases:

i.                    an increase in the price of petrol                                           (3 marks)        

ii.                  an increase in consumer’s income                                         (3 marks)

iii.                an increase in the cost of tyre                                                (3 marks)

iv.                 a decrease in using a local labour                                          (3 marks)

  

(TOTAL: 15 marks)

Section C

1.         The demand and supply schedules for watermelons are as follows:

Price (RM)	Consumer A (units)	Consumer B (units)	Supplier S (units)	Supplier T (units)	Supplier U (units)
1.20	29	32	4	8	12
1.40	24	25	10	10	15
1.60	16	22	15	15	20
1.80	11	19	19	17	22
2.00	8	14	23	20	33
2.20	5	9	27	25	35

i.                    Calculate the value of total market demand and total market supply.                                                                                                                                 (6 marks)

ii.                  Draw the market demand curve and market supply curve and label it DD1 and SS1.                                                                                                        (5 marks)

iii.                What is the equilibrium price and quantity?                                      (4 marks)

iv.                 Assuming that supplier T has gone and a new consumer     C enters the market of watermelons, and demand the amount of watermelons similar like consumer A. Draw the new market demand curve and market supply curve and label it DD2 and SS2. (show your working)                                                    (9 marks)

v.                   Explain what has happened to the new market demand and supply curves?                                                                                                                       (6 marks)

[Total : 30 marks]

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