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GENERAL FORMULAS: 2 CHARACTERISTICS OF A PERFECTLY COMPETITIVE MARKET

1. 2. 3. 4. Many buyers and sellers Firms can easily enter and exit Each buyer and seller is a price taker Single buyer or seller have negligible effect on the market price

Total revenue (TR) = (price x quantity sold) = PQ

Average revenue

Marginal revenue

Revenue of typical unit sold

= TR/Q
= PQ/Q =P

Change in TR from additional unit sold

= ∆TR/∆Q =P

IN A COMPETITIVE FIR M MARGINAL REVENUE = AVERAGE REVENUE

Where marginal revenue equals marginal cost the firm’s output maximises profit

If MR > MC, If MR < MC, If MR = MC, Firm Firm Firm maximises should should profit increase Q decrease Q

AVC = AVERAGE VARIAB LE COST

Average variable cost

TWO TYPES OF COSTS

1. Fixed costs (Costs that are independent of output) Eg: Buildings ,Rent , Machinery 2. Variable costs: Vary with the output a. Eg; Wages , utilities, materials used

SHUT DOWN OF A MARKET
Closing of the unit (when suffer serious losses) TR < VC

EXIT
Continue production with losses TR<TC

ECONOMICS OF SCALE
Increase of efficiency of production as number of items increase.

Shrunk costs: Costs that are not recoverable