Embedded Files
Four main Market structures
Four main Market structures
Perfect competition
Perfect competition
Marginal revenue (Mr)= how total revenue changes from an additional product.
Mr=chage in total revenue divided by quantity
A perfectly competitive market is shown by two separate graphs which are a graph for the market and a graph for the firm. Perfectly competitive markets tend to have...
1. Many firms
2. Low entrance and exit barriers
3. Identical products(substitutes)
4. Producers are "price takers" meaning the price they sell at must be the price set by the market
5. Due to the above reasons, the demand for the firm is perfectly elastic
6.Produces at Marginal revenue(Mr)=Marginal cost(Mc). This is point E1 on the graph.
The horizontal line on the graph for the firm is labelled "Mr=D=Ar=P" because it shows not only the marginal revenue but also the demand, average revenue and price.
Mr=Mc
Mr=Mc
The point where marginal revenue intersects with the marginal cost is where producers in a perfectly competitive market will produce. This is also known as the profit-maximizing level of output because any point above this will result in the marginal cost being greater than the marginal revenue, leading to a loss.
The Atc at the Mr=Mc quantity multiplied by the price gives the total cost
The total revenue minus the total cost gives the total profit
A firm is producing at a loss when the Atc quantity is above the Mr line.
Total revenue
Total revenue
Profit and total cost
Profit and total cost
when a firm produces at a loss
when a firm produces at a loss
Efficiency
Allocative efficiency
Allocative efficiency
Allocative efficiency, present in perfect competition, is when firms produce at P=Mc. This amount is exactly the preferable amount that consumers will intake. More or less produciton is inefficeint.
Productive efficiency
Productive efficiency
Productive efficiency, also present in perfect competition, is when P=minimim Atc. This is where products are being produced with the lowest costs using the least inputs.
Shut down rule
Shut down rule
A firm should temporarily shut down if the price falls below the average variable cost. If the Mr line is above the Atc, then the firm is profiting. However, when it falls below the Atc it is now making a loss. Despite this, even if the Mr does fall below the Atc, firms should still keep producing if the Mr is above the Avc.
The fixed costs, coloured in grey on the graph, are the rectangle between the bottom of the Atc curve and the bottom of the Avc curve(because Afc is Atc-Avc). This example shows a firm that is producing below the Atc but above the Avc. This firm is producing at a loss but should continue to produce because the losses are less than the fixed costs. This can be seen as the area of the losses is smaller than the area of the fixed costs
When the Mr falls below the Avc, then a firm should shut down because, at this point, the losses will be greater than the fixed costs. Therefore, firms should just take the loss with the fixed costs.
These shutdowns are usually temporary though because oftentimes, firms will begin to leave the market when the Mr is too low. When firms leave the market, that will result in the increase of the Mr. Conversly, when a market is producing above the Mr, other firms will join the market bringing the Mr down. Therefore, there will only be economic profits in the short run and no economic profits in the long run.
Vocabulary/Summary:
Perfect competition: A market structure in which producers and consumers have symmetrical information
Allocative efficiency: The equilibrium point where all outputs are purchased
Productive efficiency: Products are produced for their lowest price
Shut down rule: A firm should shut down once Mr goes under the Avc
Page updated
Google Sites
Report abuse