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A company will stop producing a product/service when marginal revenue (money the company earns from each additional sale) equals marginal cost (the cost the company costs to produce an additional unit). Therefore, a company is making money when MR is greater than marginal cost (MC). And when MC = MR, it is called profit maximization.
An example diagram of Profit Maximization: In the supply and demand graph, the output of is the intersection point of (Marginal Revenue) and (Marginal Cost), where =. The firm which produces at this output level is said to maximize profits.
At this point, price equals both the marginal cost and the average total cost for each good (P = MC = AC). The theory of perfect competition has its roots in late-19th century economic thought. Léon Walras [ 2 ] gave the first rigorous definition of perfect competition and derived some of its main results.
Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other but selling products that are differentiated from one another (e.g., branding, quality) and hence not perfect substitutes.
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The optimal quantity of output for the perfect competitor is where marginal cost (MC) equals marginal revenue (MR). In the case depicted, since at this quantity of output average revenue (AR) exceeds average variable cost (not shown, but below average total cost (ATC)), the firm in this situation does not shut down.
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The total cost curve, if non-linear, can represent increasing and diminishing marginal returns.. The short-run total cost (SRTC) and long-run total cost (LRTC) curves are increasing in the quantity of output produced because producing more output requires more labor usage in both the short and long runs, and because in the long run producing more output involves using more of the physical ...