Cambridge International AS and A Level Economics: Firm performance under competition and monopoly (9708)

This guide follows the Cambridge International AS & A Level Economics syllabus for examination in 2026, 2027 and 2028. It covers part of section 7.6.4: revenues and revenue curves, output and profit in the short run and long run, shutdown price, the supply curve of a perfectly competitive firm, and efficiency and X-inefficiency. The syllabus states that topics 1 to 6 are AS Level and topics 7 to 11 are A Level, which makes this unit A Level only, though the syllabus states that AS content is assumed knowledge for A Level Paper 3 and Paper 4. Market definitions and barriers to entry, contestable markets, price and non-price competition, collusion and concentration ratios are taught elsewhere and are not repeated here.

All firms, markets and numbers below are invented for illustration. Money is in currency units (cu). Read this with the revision notes and try the practice set afterwards. The course hub and checklist show the rest of the syllabus, and the price system study guide covers wider background.

What you must be able to do

Syllabus bullet	Skill
Revenues and revenue curves	Calculate TR, AR and MR; draw and explain the curves in each structure
Output and profit, short run and long run	Apply MR = MC; calculate supernormal profit, normal profit and loss; explain entry and exit
Shutdown price	Find it for the short run and long run and say why they differ
Supply curve in perfect competition	Derive it from marginal cost; explain how the industry curve follows
Efficiency and X-inefficiency	Judge productive and allocative efficiency, short and long run; explain X-inefficiency

1. Revenue and revenue curves

Total revenue is price times quantity: TR = P × Q. Average revenue is TR ÷ Q, which equals price, so the AR curve is the firm’s demand curve. Marginal revenue is the change in TR from selling one more unit.

Perfect competition. The firm is a price taker. It can sell any quantity at the market price, so each extra unit adds exactly the price. AR = MR = demand, a horizontal line at the market price. TR rises in a straight line from the origin.

Monopoly. The firm faces the whole market demand, which slopes down. To sell more it must cut the price on every unit. If demand is a straight line, MR begins at the same price-axis intercept but has twice the slope.

Worked example (monopoly, demand P = 64 − 2Q, so TR = 64Q − 2Q² and MR = 64 − 4Q):

Q	P = AR	TR	MR
0	64	0	64
4	56	224	48
8	48	384	32
10	44	440	24
12	40	480	16
16	32	512	0

TR peaks at Q = 16, where MR = 0. At Q = 16, price elasticity of demand is (1/2) × (32/16) = 1. Where MR is positive, demand is price elastic. Where MR is negative, demand is price inelastic. A profit-maximising monopolist therefore never settles on the inelastic part of its demand curve.

Monopolistic competition. Demand and MR slope down as for a monopoly, but demand is more elastic because close substitutes exist. Entry shifts the curve to the left; exit shifts it to the right.

2. Output and profit in the short run

Every firm maximises profit where MR = MC, with MC cutting MR from below. Then:

• Profit = (AR − ATC) × Q, or TR − TC.
• Supernormal profit: TR > TC. Normal profit: TR = TC, the minimum reward to keep the owner in the industry. Subnormal profit (loss): TR < TC.

Competitive firm. Costs: TFC = 50 and TVC = Q³ − 8Q² + 25Q, so MC = 3Q² − 16Q + 25.

Q	TVC	AVC	ATC	MC
3	30	10.00	26.67	4
4	36	9.00	21.50	9
5	50	10.00	20.00	20
6	78	13.00	21.33	37
7	126	18.00	25.14	60

MC cuts AVC at its minimum (Q = 4, 9 cu) and ATC at its minimum (Q = 5, 20 cu).

At a market price of 37 cu, MR = 37 and MC = 37 at Q = 6. TR = 37 × 6 = 222. TC = 50 + 78 = 128. Supernormal profit = 94 cu. Check: (37 − 21.33) × 6 = 94.

Monopoly. Demand P = 64 − 2Q and TC = 144 + 4Q + Q², so MC = 4 + 2Q. Set MR = MC: 64 − 4Q = 4 + 2Q, so Q = 10 and P = 44. TR = 440. TC = 144 + 40 + 100 = 284. Supernormal profit = 156 cu. Read the price from the demand curve, not from MC.

Monopolistic competition. Demand P = 58 − 2Q and TC = 192 + 4Q + Q². MR = 58 − 4Q = 4 + 2Q gives Q = 9 and P = 40. TR = 360, TC = 309, profit = 51 cu. In the short run this looks like a small monopoly.

3. Shutdown price

A firm compares what it loses by producing with what it loses by closing. If it closes, it still pays fixed costs. So it should produce if revenue covers variable costs, because the surplus contributes to fixed costs.

• Short run: shut down if price falls below minimum AVC. For the competitive firm above, that is 9 cu at Q = 4. For a firm with a downward-sloping AR, the rule is AR below AVC at every output.
• Long run: all costs are variable, so the firm must cover minimum long-run average cost. Below it, the firm leaves the industry.

Worked example, same competitive firm:

• Price 12 cu: MC = 12 gives 3Q² − 16Q + 13 = 0, so Q = 13/3 ≈ 4.33. TR = 52. TVC ≈ 39.48. Contribution to fixed costs ≈ 12.52. Loss = 50 − 12.52 ≈ 37.48, smaller than the 50 lost by closing. Keep producing.
• Price 9 cu: Q = 4, TR = 36 = TVC. Loss = 50 either way. The firm is indifferent. This is the shutdown price.
• Price 7 cu: below minimum AVC, so every unit loses money. Close.

A firm can survive in the short run on a price between 9 and 20 cu while making a loss, but it will not stay in the long run.

4. The supply curve of a perfectly competitive firm

Profit maximisation gives MC = MR = P. At any price the firm supplies the quantity where MC equals that price, so the MC curve shows how much it supplies at each price. Below minimum AVC it supplies zero.

The short-run supply curve is the part of MC above minimum AVC.

Price (cu)	9	20	37	60
Firm supply (Q)	4	5	6	7

Industry supply is the horizontal sum of the firms’ supply curves. With 40 identical firms, supply at 37 cu is 40 × 6 = 240. In the long run, the firm’s supply is its long-run marginal cost above minimum LRAC.

5. Output and profit in the long run

Perfect competition. Market demand: Qd = 610 − 10P. With 40 firms at a price of 37 cu, the market clears at 240 (610 − 370 = 240; 40 × 6 = 240). Each firm earns 94 cu, so new firms enter. Industry supply shifts right and price falls. Entry stops when supernormal profit is gone, at P = minimum ATC = 20 cu. Then Qd = 410, each firm makes 5, and there are 82 firms. Entry of 42 firms was needed. If price falls below 20, firms make losses and some leave, shifting supply left, until price returns to 20. Assuming costs do not change as the industry grows, the long-run industry supply curve is horizontal at 20.

Monopoly. Barriers to entry stop new firms, so supernormal profit can persist in the long run. A monopolist making a loss would leave the market if its AR were below long-run average cost at every output.

Monopolistic competition. Entry is free. Supernormal profit attracts rivals, which cuts demand for each firm until AR touches ATC at a single point and profit is normal. Example: the demand curve shifts to P = 52 − 2Q. MR = 52 − 4Q = 4 + 2Q gives Q = 8, P = 36. ATC = 192/8 + 4 + 8 = 36, so AR = ATC and supernormal profit is zero. Losses cause exit, which moves demand back to this tangency.

6. Efficiency and X-inefficiency

A firm is productively efficient when it produces at the lowest point of its ATC curve. It is allocatively efficient when P = MC, so the price buyers will pay for the final unit matches the cost of making it.

Structure	Short run	Long run
Perfect competition	P = MC always, so allocatively efficient. Productively efficient only if P happens to equal minimum ATC; at 37 cu the firm makes 6 where ATC = 21.33, above the minimum of 20	Both: Q = 5, P = MC = ATC = 20
Monopoly	P = 44 > MC = 24, so allocative loss; output of 10 is below the allocatively efficient 15	Same, because supernormal profit persists
Monopolistic competition	P = 40 > MC = 22	P = 36 > MC = 20; output 8 is below the 13.86 at minimum ATC (excess capacity), so neither efficiency holds

For the monopoly, the deadweight loss is the area bounded by demand, MC and the monopoly output, running from Q = 10 to Q = 15: 0.5 × (44 − 24) × 5 = 50 cu.

X-inefficiency is production above the lowest possible cost curve for the output chosen, caused by weak pressure to control costs. It differs from productive inefficiency, which is choosing the wrong output on the efficient cost curve. If the monopolist wastes 40 cu on unnecessary costs, TC rises from 284 to 324, ATC from 28.40 to 32.40, and profit falls from 156 to 116. Output and price stay the same because MC has not changed.

• Perfect competition: firms with higher costs make losses and exit, so X-inefficiency cannot last in the long run. In the short run, supernormal profit gives some slack.
• Monopoly: profit is protected, so X-inefficiency is more likely.
• Monopolistic competition: zero long-run profit gives a stronger push towards cost control.

Evaluation. A monopoly with large economies of scale may have lower costs than many small firms. Supernormal profit can fund research. Monopolistic competition gives consumers variety. These points can offset the efficiency losses, and they are weaker if the monopolist is X-inefficient.

Common errors

• Reading price from the MC curve at monopoly output. Price is on the demand curve.
• Using ATC instead of AVC for the short-run shutdown decision.
• Saying a competitive firm in a loss always closes. It stays while P exceeds minimum AVC.
• Drawing MR for a monopoly parallel to demand rather than steeper.
• Treating normal profit as zero revenue. It is TR = TC and is included in costs.

For timed practice, use the practice set and the free diagnostics.

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).