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Cost Theory

Profit Maximization Rule

The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.Profit Maximization Rule FormulaThe profit maximization formula…
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Economic Profit

Economic profit is different from the general business term 'profit'. The general assumption is that firms are producing goods to maximize profits. However, economists also assume that firms may aim to maximize revenue (profit is revenue - cost), maximize market share or achieve a pre-defined level of profit.What is Economic Profit? Economic…
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Barriers to Entry

Barriers to Entry are designed to prevent potential competitors from entering the market. Some barriers to entry are placed by the government, while others could be related to cost. These barriers result in different market structures such as monopolies or oligopolies (a few firms). Telecommunications and international logistics are the two…
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Perfect Competition Rise in Demand

Perfect Competition or Pure Competition (PC) is a type of market structure, which doesn’t exist and is considered to be theoretical. There are very many small firms that produce an identical product. They sell whatever they can produce, and no single firm affects the market price.In the long run, with the entry of new firms in the industry, the…
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Durable & Non-Durable Goods

Durable goods are those goods that don't wear out quickly and last over a long period. Examples of durable goods include land, cars, and appliances. While non-durable goods or soft goods are those goods that have a short life cycle. They are used up all at once or have a lifespan of fewer than three years. For example light bulbs, paper products,…
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Theory of Production: Short-Run Analysis

The Theory of Production explains the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce. And how much of each kind of labor, raw material, fixed capital goods, etc., that it employs (its “inputs” or “factors of production”) it will use. Economics, models, and…
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