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Drawing a Competition Diagram

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Drawing a Competition Diagram

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    1. Drawing a Competition Diagram Diagram should show the price and quantity where the firm is maximising profit in different types of markets. These markets range from Perfect Competition to Monopoly. It should also be possible to further analyse the position of the firm using type of profit earned and efficiency levels. Resources for Economics C Copeland

    2. How to draw competition diagrams? Resources for Economics C Copeland

    3. Averages and Marginals Marginals refer to the last or extra unit produced or sold. Averages refer to each unit produced or sold. NB Special relationship between an average and a marginal. Resources for Economics C Copeland

    4. Costs Average Cost. Total Cost Quantity. This is the cost of each unit. U-shaped curve. Marginal Cost. The additional cost of the last unit produced. Change in total cost. NB this curve has a special relationship with average cost. Remember the Average and the Marginal!!! Resources for Economics C Copeland

    5. Revenue Average Revenue. This total revenue Quantity. Better known as Price!!!! Marginal Revenue is the change in Total Revenue due to the last unit produced. Resources for Economics C Copeland

    6. Relationship between an average and a marginal Example: Average Cost [AC] and Marginal Cost [MC] If AC is falling MC must be less than AC If AC is rising MC must be greater than AC If AC is at its lowest point MC must equal AC Resources for Economics C Copeland

    7. The Cost Graphs Resources for Economics C Copeland

    8. The Revenue Graphs Resources for Economics C Copeland

    9. Perfect Competition This is the most competitive market structure. Consumers pay the lowest price [Average Revenue AR(Price) = Average Cost AC(Cost per Unit) and AC is at the most efficient point. The business operates at the most efficient output (Lowest point of AC). The firm earns normal profit in the long run (AR = AC). Now let us draw a diagram to show the above. Resources for Economics C Copeland

    10. Price Taker Firm accepts the price set by the market Resources for Economics C Copeland

    11. Short Run Equi Diagram & Explanation Produce at 25 units & sell at €10 because this is where the firm is maximising profit MC=MR MC rising faster than MR AR greater than AC [SNP] Inefficient AC not at minimum Resources for Economics C Copeland

    12. Moving to the Long Run Equilibrium Knowledge of profits, SNP attract new firms. Freedom of entry allows them to join the market causing an outward shift in the industry supply curve Resources for Economics C Copeland

    13. Long Run Equilibrium The market price has fallen and the firm as a price taker must also reduce it’s price Resources for Economics C Copeland

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