This document discusses marginal revenue and marginal cost. It defines marginal revenue as the additional revenue generated from increasing sales by one unit, and marginal cost as the change in opportunity cost from producing one more unit. A firm maximizes profit where marginal revenue equals marginal cost. Perfect competition results in allocative efficiency, with price equal to marginal cost. In long-run equilibrium under perfect competition, firms have no incentive to enter or exit the market as price equals average total cost, and no incentive to change capacity as marginal cost equals price.

1. MARGINAL REVENUE
AND MARGINAL
COST APPROACH
G R O U P 4
E C O N O M I C S 2 0 . 1

2. MARGINAL REVENUE AND
MARGINAL COST
According to the rule of profit
maximization, the firm produces the units
of output at which marginal revenue is
equal to marginal cost.
MR=MC

3. WHAT IS MR AND MC
EXACTLY THOUGH?
Marginal revenue
additional revenue that will be generated by
increasing product sales by one unit. It can also
be described as the unit revenue the last item
sold has generated for the firm.
(https://en.wikipedia.org/wiki/Marginal_revenue)

4. Marginal Cost
change in the opportunity cost that arises
when the quantity produced is
incremented by one unit, that is, it is the
cost of producing one more unit of a good.
(https://en.wikipedia.org/wiki/Marginal_cost)

5. Perfectly competitive firm’s profit is
maximized written as:
P = MR = MC
Allocative efficiency
A price equals to marginal cost
(P = MC).

6. Perfectly competitive market is
known to be the most ideal market
among the rest of the market
structures

7. PROFIT MAXIMIZATION
IN THE LONG RUN
BRIX MADELO

8. EASY ENTRY AND EXIT
• THE THIRD ASSUMPTION OF PERFECT
COMPETITION

9. WHAT DRIVES NEW
ENTRANTS IN THE
INDUSTRY?

10. PROFIT

11. RESULTING IN AN
INCREASE NUMBER OF
FIRMS

12. PROLONGED LOSS
• NUMBER OF FIRMS

13. THERE ARE CERTAIN
CONDITIONS THAT
INFLUENCE DECISIONS
OF THE FIRM IN THE
LONG RUN

14. FIRST
FIRMS HAVE NO
INCENTIVES TO ENTER OR
EXIT
PRICE (P) = AVERAGE TOTAL COST

15. SECOND
PREVAILING PRICE
IN PERFECT
COMPETITION
MARGINAL
COST
(MC)
=

16. THIRD
FIRM HAS NO INCENTIVE
TO CHANGE ITS PLANT
CAPACITY TO PRODUCE
ITS CURRENT OUTPUT

17. LONG-RUN EQUILIBRIUM IN PERFECT
COMPETITION

18. 18
LONG-RUN COMPETITIVE EQUILIBRIUM – PROFITS
S1
Output Output
$ per
unit of
output
P per
unit of
output
LAC
LMC
D
S2
P40 P1
Q1
Firm Industry
Q2
P2
q2
P30
•Profit attracts firms
•Supply increases until profit = 0

19. 19
LONG-RUN COMPETITIVE EQUILIBRIUM – LOSSES
S2
Output Output
$ per
unit of
output
P per
unit of
output
LAC
LMC
D
S1
P2
Q2
Firm Industry
Q1
P1
q2
P20
P30
•Losses cause firms to leave
•Supply decreases until profit = 0