Economics Perfect Competition Questions Medium
In perfect competition, the relationship between marginal cost (MC) and average total cost (ATC) is crucial in determining the efficiency and profitability of firms.
Marginal cost refers to the additional cost incurred by producing one more unit of output. It is calculated by dividing the change in total cost by the change in quantity produced. On the other hand, average total cost represents the total cost per unit of output and is calculated by dividing total cost by the quantity produced.
In perfect competition, firms are price takers, meaning they have no control over the market price and must accept it as given. Therefore, the firm's goal is to maximize profit by producing at the quantity where marginal cost equals the market price.
When MC is below ATC, it implies that producing an additional unit of output is cheaper than the average cost of production. In this case, the average cost of production decreases as more units are produced, leading to a downward-sloping ATC curve. This situation is known as economies of scale, where the firm benefits from increasing production and experiences lower costs per unit.
Conversely, when MC is above ATC, it indicates that producing an additional unit of output is more expensive than the average cost of production. In this scenario, the average cost of production increases as more units are produced, resulting in an upward-sloping ATC curve. This situation is referred to as diseconomies of scale, where the firm faces higher costs per unit as production expands.
In perfect competition, firms aim to produce at the quantity where MC equals the market price. At this point, the firm is operating at the minimum point of the ATC curve, known as the efficient scale. This is where the firm achieves the lowest possible average cost per unit of output.
Overall, the relationship between MC and ATC in perfect competition is that MC intersects ATC at its minimum point, indicating the efficient scale of production. When MC is below ATC, economies of scale are present, and when MC is above ATC, diseconomies of scale occur.