Chapter 14Vocab:Competitive Market (Perfectly Competitive)- A Market with MANY buyers a sellers trading IDENTICAL products so that EACH buyer and sellers are PRICE TAKERS! Firms can freely ENTER of EXIT the market. HORIZONTAL DEMAND CURVE (P/MR/AR)• No price effectAverage Revenue- TR/QMarginal Revenue- The change in total revenue from an additional unit sold.Sunk Cost- A cost that has already been committed and cannot be recovered.Market Power- If a firm can influence the market price of a good it sells.Marginal Firm- The firm that would exit the market if the price were to go any lowerInfo:▪ A competitive market is when each buyer and seller is small compared to the size of the market and, therefore, has little ability to influence market prices.▪ For all firms, AVERAGE REVENUE (AR) = PRICE (P) of the good▪ For competitive firms, MARGINAL REVENUE (MR) = PRICE (P) of the good▪ In a competitive market, AR=P=MR▪ As long as MR/AR/P exceeds marginal cost, increasing the quantity produced raises profit.▪ If marginal revenue is greater than marginal cost, the firm should increase its output.▪ If marginal cost is greater than marginal revenue, the firm should decrease its output.▪ At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal.▪ Because the firm's marginal-cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal-cost curve is also the competitive firm's supply curve.▪ A SHUTDOWN refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. A firm that shuts down temporarily still has to pay its fixed costs▪ EXIT refers to a long-run decision to leave the market. The short-run and long-run decisions differ because most firms cannot avoid their fixed costs in the short run but can do so in the long run. A firm that exits the market does not have to pay anycosts at all fixed or variable▪ If the firm shuts down, it loses all revenue from the sale of its product. At the sametime, it saves the variable costs of making its product (but must still pay the fixed costs).▪ SHUT DOWN if P<AVC▪ EXIT if P<ATC▪ ENTER P>ATC▪ PROFIT=(P-ATC) x Q▪ The competitive firm's short-run supply curve is the portion of its marginal-cost curve that lies above average variable cost.▪ The competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.▪ Over short periods of time, it is often difficult for firms to enter and exit, so the assumption of a fixed number of firms is appropriate. But over long periods of time,the number of firms can adjust to changing market conditions.▪ As long as price is above average variable cost, each firm's marginal-cost curve is its supply curve. ▪ The quantity of output supplied to the market equals the sum of the quantities supplied by each individual firm.▪ If firms already in the market are profitable, then new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits.▪ Conversely, if firms in the market are making losses, then some existing firms will exit the market. Their exit will reduce the number of firms, decrease the quantity of the good supplied, and drive up prices and profits. ▪ At the end of this process of entry and exit, firms that remain in the market must be making zero economic profit.▪ The process of entry and exit ends only when price and average total cost are driven to equality.▪ Firms are operating at their efficient scale if the long-run equilibrium of a competitive market have free entry and exit▪ MC=ATC at its minimum=P in this case meaning firms profit maximizing level and earning 0 profit.▪ P equals marginal cost MC, so the firm is maximizing profits. Price also equals average total cost ATC, so profits are zero. New firms have no incentive to enter the market, and existing firms have no incentive to leave the market.▪ In a market with free entry and exit, there is only one price consistent with zero profit—the minimum of average total cost. As a result, the long-run market supply curve must be horizontal at this price, as illustrated by the perfectly elastic supply curve in panel (b). Any price above this level would generate profit, leading to entry and an increase in the total quantity supplied. Any price below this level would generate losses, leading to exit and a decrease in the total quantity supplied.▪ Businesses stay in business even though they make 0 ECONOMIC profit because the ACCOUNTING profit is positive.▪ There are two reasons that the long-run market supply curve might slope upward. -Availability only in limited quantities-Firms may have different
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