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Unit 3: Perfect and Imperfect Competition - Coggle Diagram
Unit 3: Perfect and Imperfect Competition
Profit Maximization
Total Revenue-Total Cost Approach
Competitive producers will want to produce at the output level where total revenue > total cost by the greatest amount
Break-even point: total revenue = total cost
3 Questions:
Should I produce?
Should I produce in the Short Run?
Is it necessary to calculate the Profit/Loss in the Short Run?
Producing the output that minimises loses in the Short Run
Marginal Revenue-Marginal Cost Approach
MR=MC Rule
Price Takers: Price=MR
3 Questions:
Should my firm produce?
What amount should we produce?
What economic profit/loss will be realised?
Producing the output at which MR=MC (Price is equal to or greater than Average Variable Cost
Loss Minimising Case
Should still produce if MR> Minimum Average Variable Cost
Losses are at a minimum where MR=MC
Producing will add more to revenue than to costs
Short Run Supply
Curve:
Price exceeds minimum Average Variable Cost
Continue to produce with MR=P=MC Rule
Upsloping Line
Perfect Competition
Pure Competition
Characteristics:
Very Large Number of Sellers
Standardized Products
No Pricing Power ("Price Takers")
Easy Industry Entry and Exit
Purely Competitive Demand
Perfectly Elastic Demand
Firms produce any quantity that want
Must use market price
Horizontal line demand curve
Goods are perfect substitutes
Revenue
Average Revenue = Total Revenue/Quantity
Total Revenue = Total Revenue = Price x Quantity
Marginal revenue = Change in Total Revenue/Change in Quantity
Imperfect Competition
Monopolistic Competition
Characteristics:
Relatively Large Number of Sellers
Differentiated Products
Easy Industry Entry and Exit
Nonprofit competition (advertising)
Long Run
Normal Profit Only
Inefficient
Excess capacity = underutilisation