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Drawing a Competition Diagram

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. Remember its relationship with AC!!!! The Cost Graphs Always U Shaped Marginal Cost € Average Cost Quantity Resources for Economics C Copeland

  8. The Revenue Graphs If AR is constant [Perfect Competition] then MR = AR € Average & Marginal Revenue Quantity 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. € € QTY QTY Supply Demand Price TakerFirm accepts the price set by the market Market / Industry Firm €10 AR / MR €10 5m units 20 units 40 units Resources for Economics C Copeland

  11. 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 € QTY Short Run Equi Diagram & Explanation MC SNP AC €10 AR / MR €7 25 Resources for Economics C Copeland

  12. Supply Demand 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 P Supply 1 €10 €4 7M 5M Qty 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 • Produce at 20 units & sell at €4 because this is where the firm is maximising profit • MC=MR • MC rising faster than MR • AR = AC [Normal Profit] • Efficient AC at minimum • AR =AC = MR = MC Price MC AC €4 AR / MR 20 Qty Resources for Economics C Copeland

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