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Unit 4: Perfect and imperfect competition - Coggle Diagram
Unit 4: Perfect and imperfect competition
Pure competition
4 market models
Pure monopoly
Monopolistic competition
Pure or perfect competition
Characteristics
Standardised product
Price takers
Very large numbers
Free entry and exit
Purely competitive demand:
Perfectly elastic demand means that firm has no power to influence price so the firm merely chooses to
produce a certain level of output at the price that is given.
Average total and marginalrevenue
Marginal revenue reflects the additional revenue that the firm will receive by producing one
more unit of output.
Total revenue refers to the total amount of money that the firm collects for the sale of all of the units of their good.
average revenue is just the price of the good.
Oligopoly
Profit maximisation
TR-TC Approach
3 questions that the firm must answer.
Secondly, if it has been determined that the firm should produce
in the short run, then the firm must determine how much to produce.
Lastly, based on the answers to the first two questions, it is necessary to calculate the profit or loss for the firm.
first question is whether or not the firm should produce at all in the short run.
MR-MC Approach
3 questions
Lastly, based on the answers to the first two questions, it is necessary to calculate the profit or loss for the firm.
Secondly, if it has been determined that the firm should produce in the short run, then the firm must determine how much to produce.
first question is whether or not the firm should produce at all in the short run.
The MR = MC rule is the principle that a firm will maximize its profit (or minimize its losses) by producing
the output at which marginal revenue and marginal cost are equal, provided product price is equal to or
greater than average variable cost.
Loss minimising case
In the short run the firm only has two choices: produce or shut down. There is not enough time in the short run for the firm to go out of business. Given these options, sometimes the firm will produce, but still make a loss. In these situations, the loss from producing is smaller than the loss if the firm shut-down so this is
the firm’s best choice.
The Shutdown Case
Imperfect competition
Monopolistic competition
Monopolistic Competition and Efficiency
Productive efficiency means that the firm is producing in the least costly way and is found when P = minimum ATC.Allocative efficiency means that the firm is producing the right amount of product and isfound when P = MC.
Characteristics
Relatively large number of sellers
Differentiated products
Easy entry and exit
Long run: Only a normal profit
In the long run firms still produce the quantity where MR = MC.
Monopolistic Competition in Inefficient
In long run equilibrium a monopolistic competitor
achieves neither productive nor allocative efficiency.