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Unit 4 - Coggle Diagram
Unit 4
Profit maximisation - competitive producer will produce at the output level where total revenue exceeds total costs by the greatest amount
A pure firm will maximise profit by producing up to the point where marginal revenue is equal to marginal cost is the market price exceeds the minimum average cost.
MR = MC if P> minimus average cost
Law of diminishing returns - marginal costs increase at an increasing rate of higher levels of output.
At the initial stage, marginal production is low and marketing costs are high, with increased production the price- marginal cost relationship improves
break even point - an output at which a firm makes a normal profit ( total revenue = total costs) but not an economic profit
Break even occurs when total revenue covers costs but there is no economic benefit
Ecomomic profit = ( P - A ) X Q
The product price minus the Average total costs (ATC) multiplied by the output
Unit profit occurs when P > ATC ( Price is bigger tha Average total costs
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Losss minimisiing - continue if price exceeds the lowest AVC and is less than ATC. Continue production if firm receives enough to cover ACT and some of its fixed costs
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A competitive firm maximises profit or minimises loss in the short run by producing the output at which MR =P = MC PROVIDED that MR eceeds minimum average variable cost
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Perfect competition
Total revenue - total revenue from sale of a product divided by the quantity of the product sold (demanded)
Total revenue is equal to the price at which the product is sold when all units of the product are sold at the same price.
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Marginal revenue - the change in total revenue that results froma sale of 1 additioonal unit from the firms product
MR = The change in total revenue divided by the change in quantity sold.
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Market structure - characteristics of an industry that defines the likely behaviour and performance of its firms.
Monopolistic competition
- Many firms
- sell differentiated products
- relatively easy entry
- control over product price
- considerable nonprice competition
Oligopoly
- Few firms
- product can be standardised or differentiated
- Difficult to enter the market
- limited control over product price
- typically on nonprice competition
Pure competition
- very large number of firms
- sell a standerdised product
- easy entry in to the market
- no control over product price
- no nonprice competition
Pure Monopoly
- One firm
- sells unique product
- entry is blocked
- control over product price
- nonprice competition may or may not exist