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Kirsty's Perfect Competition (Marginal Cost Curves (Economic loss:…
Kirsty's Perfect Competition
Assumptions
All firms produce identical products
Free entry and exit
Large Number of Firms
Perfect information
Examples
Farmer's market of identical booths (i.e. carrots)
Fidget spinner market (before specialization)
Popcorn in a pond of ducks (ducks are consumers)
Marginal Cost Curves
Economic loss: where ATC>P>AVC -firm continues to produce but takes loss; opportunity cost is too high
Considers shutting down: where P=AVC -firm should consider shutting down; all money is turned to variable cost
Breaking Even: where P=ATC
same as zero/normal profit
firm should continue to produce
Shutting down: when P < AVC -firm can no longer afford variable costs
Supernormal profit: when P>ATC -firm should continue to produce as they are making high profit
Limitations
Free entry hurts companies in market
Limited choice for consumers
No incentive for innovation
With the theory: there is never truly a perfectly competitive market
Sunk Costs
a cost that has already been paid and cannot be recovered (i.e. money spent developing first product)
Profit Maximization
Consider environmental, social, etc. consequences
Satisfy investors
Maximize accounting profit
Must make right # of products, not just find lowest average cost
Use marginal cost and marginal revenue rule (MR = MC)