Marginal Cost and Marginal Revenue

Average Total Cost

Total cost of producing a particular level of output, divided by the size of output; often called average cost: ATC = AFC + AVC.

What are the conditions of a perfectly competitive market?

- Very large number of buyers and sellers. - All buyers and sellers possess perfect information about what is going on in the market. - Consumers can buy as much as they wish to purchase and firms can sell as much as they wish to supply at the ruling market price set in the market as a whole. - Individual consumer/supplier cannot affect the ruling market price through its own actions. - An identical, uniform of homogenous product. - No barriers to entry into, or exit from, the market in the long run.

Price-taker

A firm which is so small that it has to accept the ruling market price. If the firm raises its price, it loses all its sales; if it cuts its price, it gains no advantage. The assumption that a perfectly competitive firm can sell whatever qty desired at market price P1, but that it cannot influence ruling market price, means that all firms in perfectly competitive markets are passive price-takers.

Long-run marginal cost

Addition to total cost resulting from producing one additional unit of output when all the factors of production are variable.

Marginal Cost

Addition to total cost resulting from producing one additional unit of output.

Marginal Revenue

Addition to total revenue resulting from the sale of one more unit of the product. Marginal Revenue = Change in Total Revenue = Change in Output MR = CHANGE IN TR / CHANGE IN Q

Total Revenue

All the money received by a firm from selling its total output.

Average Variable Cost

Total cost of employing the variable factors of production to produce a particular level of output, divided by the size of output: AVC = TVC / Q.

Long-run average cost

Total cost of producing a particular level of output divided by the size of output when all the factors of production are variable.

Average Revenue

Total revenue divided by output. Average Revenue = Total Revenue / Output AR = TR / Q

Price-maker

When a firm faces a down-ward sloping demand curve for its product, it possesses the market power to set the price at which it sells the product.

Relate marginal cost to average variable cost and average total cost. Draw a diagram to display the relationship between marginal cost, average variable cost and average total cost.

[Figure 2.12] Firm's short-run MC curve is derived from the marginal returns of the variable factors of production, so the firm's average variable cost (AVC) curve is explained by the average returns curve. When increasing average returns are experienced, with the labour force on average becoming more efficient and productive, the AVC per unit of output must fall as output rises. But once diminishing average returns set in at point B in figure 2.11, the AVC curve begins to rise with output.

Draw and explain a diagram displaying the choice between price making and quantity setting facing a monopolist.

[Figure 2.16] The downward-sloping AR curve can affect the monopoly in two different ways. If the monopolist is a price-maker, choosing the set the price at which the product is sold the demand curve dictates the maximum output that can be sold at this price. Alternatively, if the monopolist is a quantity-setter rather than a price-maker, the demand curve dictates the maximum price at which a chosen quantity of the good can be sold. For any one good it produces, a firm cannot be a price-maker and a quantity-setter simultaneously.