Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

ECONOMICS NOTES

TOPIC 5: PERFECT MARKET

GRADE: 12

YEAR: 2025

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

TOPIC 5: PERFECT MARKET: PERFECT COMPETITION

- Perfect competition is a theoretical market structure in which the competition is

at the greatest possible level.

CHARACTERISTICS/ MARKET STRUCTURE

• Number of businesses
− There is a large number of buyers and sellers that an individual participant is
insignificant (too small) in relation to the market.
− This means no individual buyer or seller can influence the market price.
− All sellers are price takers as they must sell at the market price.
− Nature of the product
− The products sold are homogeneous, meaning they are identical in regard to quality,
size, or shape.
− It therefore does not matter from whom the consumer buys the product as they
cannot be distinguishable (differentiated).
• Market entry
− There is freedom to enter into and exit from the market. This means the market is
fully accessible to buyers and sellers.
− There are no legal, financial, technological, or any other barriers.
• Information
− Participants have full information (perfect knowledge) about the market conditions.
− Buyers have complete knowledge about price, quality and availability of products in
the market.
− For example, if one business can raise its price above the market price, buyers will
immediately know, and no one will buy.
• Control over price
− Sellers have no control over price as such they are called price takers.
− They take the price that is set by the market and charge it for their products.
• Collusion
− There is no collusion between sellers. That is every seller sells independently of
others.
• Profit
− The firm can make economic profit only in the short run.
− In the long run more firms will enter the market and only normal profit is possible.

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

THE INDIVIDUAL BUSINESS AND THE INDUSTRY

▪ An individual business is a firm that produces a particular product e.g. maize.
▪ An industry consists of all individual businesses that produce the same product e.g.
maize industry, tomato industry.
▪ In a perfectly competitive market, the price that the individual firm charges for its
products is set by the market / industry. That is why individual producers are called
price takers.
▪ The market price is the price at which the industry demand is equal to supply.
PRICE FORMATION IN THE PERFECT MARKET

Market /industry Individual firm M

D 55m S (20,000
Price
Price

D D
(R5) P (R5) P D=MR=AR

QUANTITY
Q1 Q1 Q2 Q3

Quantity

▪ The market / industry equilibrium price is P (R5) and it is the price at which demand
DD is equal to supply SS. The equilibrium quantity is Q1.
▪ The market equilibrium price P (R5) is then taken by the individual firm as the price for
its products.
▪ The individual firm ‘s production is so small that it cannot influence the market,
therefore it has to accept the market price (R5).
▪ At this price P (R5), the individual firm can produce and sell various quantities such as
Q1, Q2 and Q3.
▪ Since the individual business is a price taker, its demand curve is a horizontal
(perfectly elastic) line.
▪ For every unit of a product sold, the business receives the same price; as such the
Average Revenue (AR) that the firm receives is also the same as the price.
▪ The revenue for selling additional unit of the product (MR) will also give the same
amount as the price (AR).
▪ Therefore, the horizontal demand curve also represents the AR and the MR curves.
▪ Average revenue is the price paid per unit of the product.

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

Revenue table to show that P = AR = MR for the individual firm

Quantity Price TR AR MR
(Q) (P) (P x Q) (TR ÷Q) (∆ TR÷∆Q)
0 R5 0 - -
1 R5 R5 R5 R5
2 R5 R10 R5 R5
3 R5 R15 R5 R5
4 R5 R20 R5 R5
5 R5 R25 R5 R5

PROFIT MAXIMISATION APPROACHES

An individual firm in the perfect market can maximise profit (make highest profit)
where MC =MR or where the positive difference between TR and TC is highest.

1. Marginal cost = Marginal revenue approach

MC

8
Price (cost/revenue)

(R5 MR

3 MC = MR (Profit maximization point)

2

0 1 2 3 4 5 6 7 8

Quantity

▪ The firm makes the highest profit where MC = MR, which is at quantity 5.
▪ MC = MR is referred to as profit maximisation point.
▪ At any quantity to the left of the profit maximisation point (e.g. 1, 2, 3 and 4), the firm‘s
cost for producing any one additional unit is lower than the revenue received from such
unit (MC < MR). The firm can still increase its total profit by increasing production.

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

▪ At any quantity to the right of the profit maximisation point (e.g , 6, 7 and 8), the cost
of producing any additional units of a product is higher than the revenue received from
such unit (MC > MR). Therefore, any of the additional unit produced will reduce the
firm‘s total profit because such units bring no additional profit

2. Total revenue and Total cost approach

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R45 TC
TR
R40
C
Total revenue/total cost

R35
R30

R25

R20

R15
A
R10 Profit maximisation point
Normal profit
R5

0
0 1 2 3 4 5 6 7 8 9

Quantity

▪ A perfectly competitive firm maximises profit where the positive difference between
the total revenue and total cost is the highest.
▪ The profit maximisation point is at B and the quantity is 5.
▪ At unit 2 the firm breaks even (makes normal profit) because TR = TC.
▪ AT less than 2 unit produced, the firm makes an economic loss, so it has to increase
its production to obtain a profit.
▪ The firm makes economic profit when producing between 2 and 7 units of the
product, but this profit is the highest when producing 5 units. Economic profit is
achieved when TR > TC.
▪ The firm break even again at quantity 7 (point C), which means a normal profit is
made.
▪ When producing more than 7 units, the firm makes an economic loss again because
TC > TR.

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Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

SUPPLY CURVE OF A FIRM IN A PERFECT MARKET

MC
AC

P2 /R5
7 MR=AR/D

MR =AR/D
REVENUE/ COSTS

P/R4
AVC

P/R3
MR=AR/D

Shut down point

Output (Quantity)

▪ The supply of the individual firm in a perfectly competitive market is determined

where the MC and AVC curves meet (intersect).
▪ This is because the individual firm will only produce when the price lies above
the minimum point on the AVC curve.
▪ The firm‘s supply curve is formed by the upward sloping part of the Marginal
Cost (MC) curve.
▪ If the market price is equal or below Average Variable Costs (AVC), the firm
should close /shut down. This means the shut- down point it where the P = AVC.

MC
AC
C
P3 (R5) MR=AR
B
P2 (R4)
REVENUE/ COSTS

AVC MR=AR

P1 (3,50)
A
P (R3) MR=AR

10 20 25

Output (Quantity)

▪ AT point A, the firm must shut down because the revenue it earns form price P
(R3) can only cover the Variable costs of production (P = AVC). Example of
variable costs are raw material, water & electricity, petrol, wages etc. This means

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

it cannot afford to pay for its fixed costs such as rent, salaries, insurance etc.
Therefore, production cannot continue.
▪ The quantity of 10 above will not be produced since the firm will have been shut
down.
▪ At any price above shut –down point (A) but below Point B (e.g. R3.50,) the firm
can cover all its variable costs (P > AVC) and some of its fixed costs. The firm can
operate but because the price of R3, 50 is below the Average Costs of R4, the firm
makes an economic loss.
▪ AC indicate the average of total costs which are variable and fixed. Therefore, the
distance between A and B represents an economic loss.
▪ At market price of P2 (R4), the firm makes normal profit, because the revenue it
earns from the price of R4 per item is equal to the average cost of R4 (P or AR =
AC).
▪ At a market price of P3 or R5, the firm makes economic profit because the price is
higher than AC. This means, the amount it receives per unit is more than the
amount spent on production. Therefore, it has extra profit left after all expenses are
paid.

SHORT RUN PROFITS AND LOSSES /VARIOUS EQUILIBRIUM POSITIONS IN PERFECT

MARKET (POSSIBLE ESSAY)

▪ In the short term a perfectly competitive firm can makes economic profit, normal
profit or economic loss.

NORMAL PROFIT
▪ It is the minimum payment required to prevent the entrepreneur from leaving and
using his/her factors of production elsewhere
▪ Normal profit is the profit that the entrepreneur earns when the firm’s costs are
equal to its revenue.

MC AC

e D= AR = MR=P
R20
Price/revenue/costs

100
Quantity
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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

▪ Point e where MR= MC is the breakeven point,

▪ The firm’s average cost of R20 equal to its average revenue of R20.
▪ The firm ‘s total costs are equal to the Total costs, therefore the firm makes normal
profit
CALCULATIONS
Normal profit = TR – TC
= (P x Q) – (AC X Q)
= (20 X 100) – (20 X 100)
= 2000 - 2000
=R0

ECONOMIC PROFIT = TR > TC

▪ Economic profit is the extra profit that the firm makes above normal profit.
▪ Economic profit is achieved when total revenue is higher than total costs

MC

AC
Price/revenue/costs

e
R20 AR =MR=D
ECON PROFIT

R15

100//Q 400
Quantity✓

▪ The firm profit maximisation point is at point e where MC = MR.

▪ The lowest point of the Average Cost curve lies below the price.
▪ The Average Revenue is higher than Average Cost (AR > AC).
▪ At the price of R20, the firm makes R5 profit per unit sold because the AC is
R15.

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

CALCULATIONS

Economic profit = TR - TC
= (P x Q) - (AC x Q)
= (20 x 100) - (15 x 100)
= 2000 - 1500
= R500

ECONOMIC LOSS
▪ Economic loss is achieved when Total Revenue is less than Total Costs (TR < TC).

MC AC

R23
ECON LOSS
Price/revenue/costs

R20 e AR =MR=D

100 Quantity

▪ The Average Revenue/ price of R20 is lower than the Average Costs (AC) of
R23.
▪ The firm makes a loss of R8 per unit of a product sold.
▪ The firm loss minimisation point is where MC =MR, at point e. This is the point
at which the firm must produce to keep its loss at a lowest level.
Calculations
Economic loss = TR - TC
= (P x Q) - (AC x Q)
= (20 X 100) - (23 x 100)
= 2000 - 2300
= - 300

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

LONG RUN EQUILIBRIUM OF AN INDUSTRY AND INDIVIDUAL FIRM

S 20000 S1 25000 SMC SAC MC

20 LAC
D
AR= MR
P (R5)

R3
P1 (R3) AR=MR

S S1 D
120 140

QUANTITY

▪ In the short run the price (P or R5) is higher than the SAC, the firm makes economic
profit (represented by the shaded area).
▪ In the long run the economic profit attracts new businesses in to the market as
such supply will increase (shift to S1S1)
▪ Furthermore, the increase in supply will come as a result of existing firms increasing
their production levels.
▪ The increased supply causes the price to fall to price P1. The price is at a point where
LAC= AR Therefore, the firm makes normal profit

COMPETITION POLICY
▪ In South Africa, competition policy is carried out using the Competition Act of 1998.
▪ The Competition act provides for the establishment of the Competition Commission,
Competition Tribunal and the Competition Appeal Court.
▪ The Competition Commission‘s role is to investigate acts of restrictive practices by
businesses. It also make recommendations on mergers and acquisitions applications.
▪ The Competition Tribunal is responsible for providing judgement over the cases
referred to it by the Competition commission.
▪ The Competition Appeal Court serves those businesses that are unhappy with the
judgement of from the Competition Tribunal. The appeal court may confirm, amend or
set aside a decision made by the Competition Tribunal.

Aims of competition policy

▪ To promote healthy competition among businesses.
▪ To prevent restrictive practices such as collusion.
▪ To protect the consumer against unfair pricing and inferior products.
▪ Provide all South Africans with equal opportunities to participate fairly in the
economy.
▪ To regulate the growth of market power by means of takeovers and mergers.
▪ To prevent the abuse of economic power such as of monopolies

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Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

GRADE 11 COST AND REVENUE

SHOULD BE REVISED, AND THEY ARE EXAMINABLE

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

TOPIC: EFFECTS OF COSTS AND REVENU

− Economists consider both explicit costs and implicit costs when counting profit.
− Therefore, economic profit is the positive difference between total revenue and total
costs which consist of costs of production (explicit) and the cost of the opportunity left
elsewhere (implicit). Implicit cost is also called opportunity cost.
− An example of opportunity cost: a person works in a car wash business and earns an
income of R1500 per month. Then this person decided to leave the job to open a
business of selling cabbages. His/her opportunity cost is the amount of R1500 which
she/he was sure to get every month. When economists count costs they add the
amount spent on factors of production in the new business (explicit) costs plus the
salary given up (implicit cost).
− In other words, accounting profit excludes implicit cost, while economic profit
includes both explicit and implicit costs. Therefore, profit counted in an accounting
way is higher than the same profit counted in an economic way.

1. SHORT RUN COSTS

− Short run in production is a period so immediate that a firm cannot change all its
factors of production (It is a period in production during which some factors of
production remain fixed).
− In other words, the period is so short that the firm cannot have enough money to
expand all its production inputs. Factors that need a lot of money usually remain fixed
in the immediate term e.g. land (building), expensive machines and equipment.

− The costs associated with the fixed inputs are called fixed costs (e.g. rent) while the
costs associated with variable inputs are called variable costs (e.g. raw material)
− In production, a period (e.g. short run) is not measured in literal (exact) time but it is
measured in the time the firm takes to have enough money to afford to change all
inputs (factors of production)
− In other words, one cannot say short run is one year (for example), because for some
it can be few months while for others it can be years (it depend on the type of
business).
− Example a short run for a fat cake seller may be few months while for a firm producing
electricity, a short run may be several years. This is because the fixed costs of the fat
cake business can be a stall which causes relatively less money. The fixed costs of a
firm producing electricity is power stations which costs billions of rands.

1.1 Total costs (TC)

− Total costs are the sum total of all fixed costs and all variable costs.
− Fixed costs are costs that remain the same irrespective of the level of production e.g.
rent, insurance, salaries etc. The sum of all fixed costs is called total fixed costs

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

− Variable costs are costs that change with the level of output e.g. raw material,
electricity, fuel. The sum of all variable costs is called total variable costs
− Total costs can never be zero, because of the fixed costs which are incurred even
when no production takes place.
− The formula (equation) for total cost is: TC = TFC + TVC

1.2 Average Costs (AC or ATC)

− Average costs are costs per unit of output. This means they explain how much has
cost the firm to produce each unit. It is obtained by dividing the total costs by quantity
produced.
AC = TC ÷ Q
− The average variable costs are obtained by dividing total variable costs by quantity
produced (AVC = TVC ÷ Q).
− The average fixed costs is obtained by dividing total fixed costs by quantity produced
(AFC = TFC ÷ Q)

1.3 Marginal costs

− Marginal cost is an additional cost incurred when a firm produce one additional unit of
an output.
− It shows the amount by which the total cost has increased after producing one extra
unit.
− It is obtained by dividing the change in total costs by a change in quantity produced
MC = ∆ TC
∆Q
2. A COST SCHEDULE FOR SELLING CABBAGES

Q TFC TVC TC AFC AVC AC /ATC MC

(TFC + TVC (TFC ÷ Q) (TVC ÷ Q) (TC ÷ Q) (∆TC ÷∆Q)

0 200 0 200 - - -

1 200 80 280 200 80 280 80

2 200 100 300 100 50 150 20

3 200 110 310 67 37 103 10

4 200 130 330 50 33 83 20

5 200 160 360 40 32 72 30

6 200 200 400 33 33 67 40

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

3. SHORT RUN COST CURVES

3.1 Total fixed costs curve

300
Cost in rands

250
200 TFC
150
100
50

0 1 2 3 4 5 6 7 8

Quantity/output

4.2 Total variable cost curve

250
200
Cost in rands

150

100

50

0 1 2 3 4 5 6

Quantity/output

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

3.2 Total costs curve

400
Costs in rands

350
300
250
200
150
100
50

0 1 2 3 4 5 6 7 8
Quantity

4.4 Average Fixed Costs curve

200

150
Costs in rands

100

50

0 0 1 2 3 4 5 6 7 8

Quantity

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

4.5 Average Variable Costs curve

80

70
Cost in rands

60

50

40

30

20

0 1 2 3 4 5 6 7 8

Quantity /output

4.5 Average cost (Average total cost) curve

280
Costs in rands

200
160
120

80

40

0
0 1 2 3 4 5 6 7
Quantity/output

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

Marginal cost curve

80

70

60

50

40
Costs

30

20

10

0 1 2 3 4 5 6 7 8

Quantity /output

4. TOTAL COST CURVES ON ONE SET OF AXES

TC

TVC
Costs

TFC

0 1 2 3 4 5 6 7 8
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Quantity
Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

5. Average and marginal costs on one set of axes

MC

AC
Costs

AVC

AFC

Quantity/output

1. LONG RUN AVERAGE COSTS OF A FIRM

− Long run is a production period long enough for a firm to be able to change all
factors of production. There are no fixed factors of production, therefore, there is
no fixed costs. All factors of production are variable; therefore, all costs are
variable.
− Different industries can achieve their long run at different times because the long
run (and short run) is not determined by the period of time a firm has been
operating, but it is determined by the firm’s ability to afford to pay for their changes
in all production factors. When the firm can afford to increase (or decrease) all its
resources, the firm has reached the long run. A long run of a fat cake seller can be
a few months to a year while the long run of a car manufacturer can be a number
of years.
− The LRAC curve usually consists of a number of short-run curves.
− Each time a business changes its size it will have a new SRAC curve.
− In the long run when a firm increases its production, there can be three different
effects on costs and are represented below:

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Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

Economies of scale

Costs per unit

LRAC

Output

− When a firm first expands, it can experience economies of scale.

− Economies of scale is when a firm’s production costs (LRAC) decreases as
production increases.
− Due to economies of scale, the long run average cost (LRAC) curve slopes
downwards from left to right.
− This is due to the costs decreasing as units produced increasing.
− This means that as the company produces more, the marginal costs becomes
lower than of that of the previous unit. This is because the fixed costs can then
be divided among more units than before and in some instances buying in bulk
can make the firm be given some discounts when buying inputs.

Constant return to scale

Costs per unit

LRAC

Quantity

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

− Constant return to scale is when the firm‘s average cost (LRAC) remain
unchanged as it produces more. This means the additional units will have the
same costs as the previous units.
− Therefore, there is no benefit for the firm to produce more units.

Diseconomies of scale

LRAC
Costs per unit

Output

− If the business can continue growing, it will reach a stage where it experiences
diseconomies of scale.
− Diseconomies of scale is when cost per unit increases while the quantity produced
increase.
− This means the firm has become too big to manage effectively.
− The firm may experience other problems such as machinery breakdowns, workers
may become inefficient due to their large numbers.

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Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

2. THE LRAC CURVE

LRAC
Costs

Constant return
to scale

Output/Quantity

LRAC SHOWING SERIES OF SHORT RUNS

Costs

SAC1
SAC2 LRAC
SAC5
SAC3
SAC4

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

REVENUE CALCULATIONS
− For a business to know whether it is able to make profit it should consider both costs
and revenue
− Revenue is income that the firm earn from selling its products.

Types of revenue
1. Total revenue (TR)
− Total revenue is the sum of incomes earned from the sale of the goods or services
produced.
− Total revenue is calculated by multiplying quantity (Q) of products sold by price (P).
TR = P x Q

2. Average revenue
− Average revenue is the price per unit of product. it is calculated by dividing total
revenue by quantity sold.
AR = TR ÷ Q

3. Marginal revenue
− Marginal revenue is the revenue earned from selling one extra unit of a firm ‘s
products.
− It represents a change in total revenue as one additional unit is produced.
− It is calculated by dividing a change in total revenue by a change in quantity sold.
MR = ∆TR
∆Q

Revenue schedule of a firm

QUANTITY PRICE TOTAL REVENUE AVERAGE REVENUE MARGINAL
(Q) (P) (TR) (AR) REVENUE
(MR)
0 150 0 − −
1 150 150 150 150
2 150 300 150 150
3 150 450 150 150
4 150 600 150 150
5 150 750 150 150
6 150 900 150 150

PROFIT AND LOSES

− Profit is the positive difference between total revenue and total costs of the firm.
− If the total costs are higher than the total revenue the firm makes an economic
loss
− In Economics there are two types of profits namely: normal profit and economic
profit

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 Economics/ Grade 12 Topic 5 Notes Nkangala District/ 2025

− Normal profit is the minimum payment the firm should earn to stay in business.
− Normal profit is obtained when the firm breaks even which means when the total
revenue is equal to total cost (explicit costs and implicit cost)
− Economic profit is the extra profit that the firm makes above the normal profit.
− It is when total revenue is higher than total costs (explicit and implicit costs
Q PRICE TC TR PROFIT/ LOSS
(P) (Implicit & explicit) (TR – TC)

0 150 200 0 -200

1 150 280 150 -130
2 150 300 300 0
3 150 310 450 150
4 150 330 600 270
5 150 360 750 390
6 150 520 900 380
7 150 600 800 200
8 150 850 850 0
9 150 890 860 -30
10 150 950 900 -50

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