c



 
 
c


 
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= The original demand and supply curves of ë and
intersect

at 
.
= Êrice and quantity of p
and 
.
= Ghen each firm¶s production costs fall, the supply curve
(which is the sum of the marginal cost curves of all firms in the
industry) shifts downward by the amount of the fall in costs, to
.
= àf price fell by the full amount that costs had fallen, price would
become p2.
= ànstead, price falls to p, while quantity rises to , at the new
equilibrium .
 
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#$%&'

= The typical firm is shown in equilibrium at market price p
with

cost curves 
and M
.
= The cost curves then shift to  and M.
= The firm would be willing to produce output 
at price p2.
= ànstead, price falls only to p, and the firm increases its output to
.
= t this price-quantity combination it earns profits shown by the
dark blue area.
( #)'
'!

= Êlant 1 is the oldest plant in operation.

= àt is just covering its average variable costs.
= àt will close down when price falls below p
.
= Êlant 2 is of intermediate age.
= àt is covering u
variable costs and earning some contribution
towards its fixed costs as shown by the shaded area in part (ii)
= Êlant 3 is the newest plant with the lowest costs.
= àt is fully covering its fixed costs as shown by the dark shaded
area in (iii).
= àt is also making additional profits (shown by the light shaded
area).
= These profits offset the losses it expects to suffer later, when
firms with newer technology enter the industry.
  
c

= The curve represents the non-OÊ
supply curve of oil.

= àf OÊ
countries supply all that is demanded at the world price
pW, the world supply curve is W.
= t that price production is  in non-OÊ
countries and 
± 
in
OÊ
countries.
= [y fixing its production, OÊ
can shift the world supply curve to
W .
= ÷ow the horizontal distance between and W is OÊ
¶s
production.
= The world price rises  pW.
= Êroduction is  in non-OÊ
countries and 2 ±  in the OÊ

countries.
= OÊ
has increased its oil revenues because although sales fall,
the price rises more than in proportion.
= ÷on-OÊ
countries gain doubly because they are free to produce
more and to sell it at the new, higher world price.
 *  + ,-
+ ,-#

= The µbest¶ level of output depends on the motivation of the firm.

= The curve shows the profits associated with each output.
=  profit-maximizing firm produces output  , and earns profit  .
=  sales-maximizing firm with a minimum-profit constraint of 
produces the output .
=  satisficing firm with a target level of profits of  is willing to
produce any output between 
and .