Cambridge A Level Economics: Firm performance under competition and monopoly (9708) – Revision Notes

Quick recall for Cambridge International AS & A Level Economics, syllabus for examination in 2026, 2027 and 2028, section 7.6.4 (part): revenue curves, output and profit, shutdown price, the competitive supply curve, and efficiency and X-inefficiency. The syllabus places topics 7 to 11 at A Level, so this unit is not examined at AS. Full explanations are in the study guide. Test yourself with the practice set, check progress on the checklist, and see the course hub. The free diagnostics show which topics need work. All figures are invented.

Definitions

Term	Meaning
Total revenue (TR)	P × Q
Average revenue (AR)	TR ÷ Q = price = the firm’s demand curve
Marginal revenue (MR)	Change in TR from selling one more unit
Normal profit	TR = TC; the minimum reward to keep the owner in the industry
Supernormal profit	TR > TC, so (AR − ATC) × Q is positive
Subnormal profit	TR < TC, a loss
Shutdown price (short run)	Minimum AVC
Shutdown price (long run)	Minimum long-run average cost
Productive efficiency	Output at minimum ATC
Allocative efficiency	P = MC
X-inefficiency	Costs above the lowest possible for the output produced, because of weak pressure to cut costs

Revenue curves by structure

Structure	AR (demand)	MR	Notes
Perfect competition	Horizontal at market price	Same line as AR	TR is a straight line from the origin
Monopoly	Downward sloping	Below AR; twice as steep if demand is straight	MR = 0 where TR is at its maximum and PED = 1
Monopolistic competition	Downward sloping, flatter than monopoly	Below AR	Shifts left with entry and right with exit

Elasticity link. MR > 0 where demand is elastic. MR = 0 at unit elasticity. MR < 0 where demand is inelastic.

Method in steps: find output and profit

1. Write MR (for a price taker, MR = market price).
2. Set MR = MC, checking MC cuts MR from below.
3. Read price from AR (demand) at that output.
4. Calculate TR = P × Q and TC = ATC × Q.
5. Profit = TR − TC. Classify it as supernormal, normal or subnormal.
6. If profit is negative, compare the price with AVC for the shutdown decision.

Worked reminder (monopoly, demand P = 64 − 2Q, TC = 144 + 4Q + Q²): MR = 64 − 4Q and MC = 4 + 2Q, so Q = 10 and P = 44. TR = 440, TC = 284, supernormal profit = 156 cu.

Worked reminder (competitive firm, TFC = 50, TVC = Q³ − 8Q² + 25Q, so MC = 3Q² − 16Q + 25): at 37 cu, MC = 37 gives Q = 6. TR = 222, TC = 128, supernormal profit = 94 cu. At 20 cu, Q = 5, TR = 100 = TC, so profit is normal. At 9 cu, Q = 4, TR = 36 = TVC, so the loss equals TFC of 50.

Shutdown rules

• Short run: produce if AR is at least AVC. Revenue then covers variable costs and contributes towards fixed costs.
• A loss smaller than total fixed cost means keep producing. A loss larger than total fixed cost means close.
• Long run: stay only if AR covers long-run average cost.
• Firm with TFC = 50 and minimum AVC = 9: at 9 cu it loses 50 whether it produces or closes, so 9 cu is its shutdown price.

Deriving the competitive firm’s supply curve

1. A price taker sets MC = MR = P.
2. At each price the quantity supplied is read from the MC curve.
3. Below minimum AVC the quantity is zero.
4. Short-run supply: MC above minimum AVC.
5. Long-run supply: long-run MC above minimum long-run average cost.
6. Industry supply: horizontal sum of the firms’ curves.

Price (cu)	9	20	37	60
Quantity per firm	4	5	6	7

Short run versus long run by structure

Structure	Short-run profit	Long-run adjustment	Long-run profit
Perfect competition	Supernormal, normal or subnormal	Entry if supernormal; exit if subnormal; price returns to minimum ATC	Normal only
Monopoly	Usually supernormal	Barriers block entry	Supernormal can persist
Monopolistic competition	Supernormal, normal or subnormal	Entry or exit shifts demand until AR is tangent to ATC	Normal only

Long-run sequence in perfect competition. Supernormal profit, then entry, then industry supply shifts right, then price falls, then supernormal profit disappears. For losses the sequence runs the other way, ending at normal profit.

Efficiency summary

Structure	Allocative (P = MC)	Productive (minimum ATC)
Perfect competition, short run	Yes	Only if price happens to equal minimum ATC
Perfect competition, long run	Yes	Yes
Monopoly, short and long run	No: P above MC	Not normally: output is rarely at minimum ATC
Monopolistic competition, short run	No	No
Monopolistic competition, long run	No: P above MC	No: excess capacity, output below minimum-ATC level

Deadweight loss in monopoly is the welfare area under demand and above MC between the monopoly output and the allocatively efficient output.

X-inefficiency. Competitive pressure forces cost control, so it is least likely in perfect competition in the long run. It is most likely where profit is protected, as in monopoly. It lifts the average cost curve without changing the shape of the marginal cost curve if the waste is a fixed amount, so output and price may stay the same while profit falls.

Must-know distinctions

• Productive inefficiency (wrong output on the cost curve) versus X-inefficiency (the whole cost curve is too high).
• Normal profit (zero supernormal, included in costs) versus a loss.
• Shutdown price in the short run (AVC) versus long run (long-run average cost).
• Monopolistic competition in the long run earns normal profit, but that does not make it efficient: price is still above MC.
• Evaluation: monopoly may still give lower costs through economies of scale, funds for research, and variety in monopolistic competition.

Evaluation chains to rehearse

• Perfect competition is efficient in the long run: price equals marginal cost and minimum average cost. But few real markets have identical products, perfect information and free entry, so treat it as a benchmark. Constant long-run costs are also assumed.
• Monopoly is inefficient: price above MC and output below the efficient level. But economies of scale may lower average cost, and supernormal profit can fund research and development, so the result depends on how costs and reinvestment compare.
• Monopolistic competition: normal profit in the long run and variety for consumers, but excess capacity and price above MC. The judgement depends on how much consumers value variety.
• X-inefficiency: a weak competitive threat allows slack. The size of the effect depends on how well owners monitor managers and how strongly rivals or regulators respond.

Quick self-test

1. A price taker sells 40 units at 15 cu. Calculate TR and MR.
2. A monopolist faces P = 40 − Q. Find MR, the output at which TR is maximised, and TR at Q = 12.
3. A firm sells 30 units at 8 cu with ATC of 6.50 cu. Calculate profit and name its type.
4. A competitive firm has minimum AVC of 14 cu and minimum ATC of 22 cu. The price is 17 cu. State what it does in the short run and the long run.
5. A firm produces 20 units at 10 cu with AVC of 8 cu and TFC of 80 cu. Should it continue?
6. A firm has TVC = Q² + 4Q, so MC = 2Q + 4. Find its supply at 18 cu and the supply of 50 identical firms.
7. In long-run equilibrium, a monopolistically competitive firm sells 12 units at AR = ATC = 30 cu. Calculate TR and profit.
8. A firm’s ATC at 100 units is 12.50 cu, but the lowest cost achievable is 10 cu. Name the problem and calculate the cost of it.
9. A good sells at 26 cu with MC of 18 cu. Is output too high or too low?
10. A monopolist has P = 60 − Q and constant MC = 30. Find its output, price and the deadweight loss.

Answers

1. TR = 15 × 40 = 600 cu. MR = 15 cu.
2. TR = 40Q − Q², so MR = 40 − 2Q. MR = 0 at Q = 20. At Q = 12, P = 28, TR = 336 cu.
3. Profit = (8 − 6.50) × 30 = 45 cu. Supernormal.
4. Short run: continue, because 17 > 14. Long run: price below 22 means losses, so it leaves unless price rises.
5. TR = 200, TVC = 160, contribution = 40. Loss = 80 − 40 = 40, smaller than TFC. Continue.
6. 2Q + 4 = 18 gives Q = 7. Fifty firms supply 350.
7. TR = 360 cu. Profit = 0 (normal profit).
8. X-inefficiency. Excess cost = (12.50 − 10) × 100 = 250 cu.
9. P > MC, so too little is produced.
10. MR = 60 − 2Q = 30 gives Q = 15, P = 45. Efficient Q = 30. DWL = 0.5 × (45 − 30) × 15 = 112.5 cu.

Where marks are usually lost

• Reading the monopoly price from MC instead of demand.
• Using ATC instead of AVC for the short-run decision.
• Saying a loss-making firm should always close.
• Labelling the supply curve as the whole MC curve and forgetting the part below minimum AVC.
• Writing that a perfectly competitive firm is productively efficient in the short run without conditions.
• Calling any profit “normal profit” when TR exceeds TC.
• Confusing X-inefficiency with productive inefficiency.
• Describing long-run adjustment without saying what shifts: entry moves industry supply, but in monopolistic competition it moves each firm’s demand.
• Giving efficiency conclusions with no evaluation, such as economies of scale or research funding.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, Cambridge University Press & Assessment, section 7.6.4 (part).