Competitive Equilibrium

Competitive Equilibrium - Competitive Equilibrium MR = MC...

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Competitive Equilibrium MR = MC rule: Equilibrium of a firm is a condition where profits are maximized. The analytical condition of equilibrium is stated as a point of equality between Marginal Revenue and Marginal Cost. It ensures the profit as Profit max = TR - TCmax where MR = MC i.e. the difference between Total Revenue and Total Cost. (TR - TC) is maximized automatically when this condition is satisfied. This MR = MC rule is equally applicable to a competitive or monopolistic or oligopolistic or any other form of the market. This can be explained with the help of a figure. In Figure 33, P - AR = MR is the demand or Average and Marginal Revenue curve. AC is the Average Cost curve and MC the Marginal Cost curve.
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Point e is the point of intersection of AC and MC; hence at the minimum point on AC there is equality between MR and MC. Therefore e is the point of equilibrium where profits are maximized. At the equilibrium point market price is P and output produced is Q. For any other output
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Competitive Equilibrium - Competitive Equilibrium MR = MC...

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