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perfect and imperfect competition - Coggle Diagram
perfect and imperfect competition
pure or perfect competition
involves a large number of firms producing standardized products.
new firms can enter and exit easily and must accept market price
examples include Financial markets, agricultural products, raw materials
characteristics of pure competition:
• Standardized goods: Purely competitive businesses create standardized goods. Customers don't mind which seller they buy from as long as the price is the same.
• Free entry and exit: New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal, technological, financial, or other obstacles prohibit new firms from selling their output in a competitive market.
• Very large numbers: The presence of a sizable number of independently operating sellers, many of whom sell their goods in sizable domestic or international markets
•Price takers: the competitive firm is a price taker: It cannot change the market price; it can only adjust to it.
demand as seen by a purely competitive seller
firms demand curve is perfectly elastic
Average revenue
Total revenue from the sale of a product divided by the quantity of the product sold (demanded; equal to the price at which the product is sold when all units of the product are sold at the same price.
total revenue
The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
marginal revenue
The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
profit maximization in the short run
total revenue-total cost approach
Confronted with the market price of its product, the competitive producer will ask three questions:
(1) Should we produce this product?
(2) If so, in what amount?
(3) What economic profit (or loss) will we realize?
TR and TC are equal when 2 curves intersect
break-even point: an output at which a firm makes a normal profit but not an economic profit
break-even point occurs where total cost catches up with total revenue,
marginal cost-marginal revenue approach
MR=MC RULE
accurate guide to profit maximization for all firms
can be restated as P = MC
Profit maximising case
profit=(P-A)-Q
Loss minimizing case
MC>MR
Shutdown case
MR (=P) =MC
Marginal cost and short run supply
changes in supply
technology < shifts supply curve downwards,indicates increase in supply
wages will shift supply curve upwards, indicates decrease in supply
firm and industry(equilibrium)
market price and profits
To determine the equilibrium price and output, we must compare the total-supply data with total-demand data
Another way of calculating economic profit is to determine per-unit profit by subtracting average total cost from product price and multiplying the difference by the firm's equilibrium level of output
firm versus industry
fallacy of composition
The false notion that what is true for the individual (or part) is necessarily true for the group (or whole).
profit maximization in the long run
assumptions
• Identical costs All firms in the industry have identical cost curves.
• Constant-cost industry The industry is a constant-cost industry. That is, the entry and exit of firms do not affect resource prices or, consequently, the individual firms' ATC curves
•Entry and exit only The only long-run adjustment in our graphical analysis is caused by firms' entry or exit.