Lesson Notes By Weeks and Term - Senior Secondary 2

Price and quality determination

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Term: 1st Term

Week: 4

Class: Senior Secondary School 2

Age: 16 years

Duration: 40 minutes of 2 periods each

Date:       

Subject:      Economics

Topic:-       Price and quality determination

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

  1. Describe when equilibrium in the short-run and long-run
  2. Describe when a competitive firm will make a loss

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

PRESENTATION

TEACHER’S ACTIVITY

STUDENT’S ACTIVITY

STEP 1

INTRODUCTION

The teacher reviews the previous lesson on concept of utility

Students pay attention

STEP 2

EXPLANATION

She describes equilibrium in the short-run and long-run

Students pay attention and participates

STEP 3

DEMONSTRATION

She describes when a competitive firm will make a loss

Students pay attention and participate

STEP 4

NOTE TAKING

The teacher writes a summarized note on the board

The students copy the note in their books

 

NOTE

PRICE AND QUALITY DETERMINATION

EQUILIBRIUM IN THE SHORT-RUN

The short run is the period in which a firm can vary its output by changing the variable factors of production. In the short-run, a firm can make abnormal profit. Since the market determines the prices at which goods should be sold, a firm can choose the quantity that will maximize its profits.

Equilibrium occurs when the following conditions are satisfied:

  1. Marginal cost is equal to marginal revenue (MC=MR)
    2. Marginal cost should cut the marginal revenue from below at the point of equality.

In the figure below, at point b price is greater than marginal cost; therefore it is better to increase output. The firm is at equilibrium at point S where MC=MR=P=AR. At this point, the firm is making abnormal profit. This is represented by rectangle PORS.

 

EQUILIBRUM IN THE LONG- RUN

The long run is a period in which all cost varies with the level of output. During the period, firms can adjust their scale of operation. In order to enjoy the abnormal profit, new firm are likely to enter the market with the entrance of new firms, supply will increase and price may fall if demand remains constant, therefore both the new and old firms will adjust their output to the new price. In the long run, the firms will make normal profit because all the firms will just be covering average cost. Equilibrium will be reached when marginal cost equal to marginal revenue and price (MC=MR=AC=AR=P=D+).

The firm produces Oqi and sell at OP. The producer will be making normal profit because the average cost is tangential to average revenue.

 

LOSS OF A COMPETITIVE FIRM

A perfect firm will be making loss if the price is below the average cost.

In the figure above, at price P, the firm suffers losses since price is below the average cost. Loss is therefore represented by apbc. If the firm cannot cover its average cost it may close down. This may be the point of exit from the market.

 

EVALUATION:    1. Describe equilibrium in a short-run and a long-run

  1. Describe when a competitive firm will suffer losses

 

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively