competitive market market with many buyers sellers trading identical products so that each buyer seller is a price taker Chapter 14 Firms in Competitive Markets What is a Competitive Market The meaning of Competition o o o there are many buyers and sellers in the market the goods offered by the various sellers are largely the same firms can freely enter exit the market The Revenue of a Competitive Firm average revenue total revenue divided by the quantity sold o PxQ Q P marginal revenue change in total revenue from an addt l unit sold o For competitive firms marginal revenue equals the price of the good Profit Maximization and the Competitive Firm s Supply Curve Marginal Cost Curve and the Firm s Supply Decision 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 Firm s Short Run Decision to Shut Down Shutdown short run decision not to produce during a period of time because of current market conditions Exit long run decision to leave the market firm that shuts down temporarily still has to pay its fixed costs a firm that exits the market does not have to pay any costs at all firm shuts down if the revenue that it would get from producing is less than its variable costs of production TR VC total revenue less than variable cost TR Q VC Q revenue quantity less than variable cost quantity P AVC price less than average variable cost Measuring Profit in out Graph for the Competitive Firm Profit TR TC Profit TR Q TC Q xQ Profit P ATC xQ Supply Curve in a Competitive Market The Short Run Market Supply with a Fixed Number of Firms The Long Run Market Supply with Entry and Exit firms that remain in the market must be making zero economic profit profit P ATC xQ process of entry and exit ends only when price and average total cost are driven to equality in the long run equilibrium of a competitive market with free entry and exit firms must be operating at their efficient scale A Shift in Demand in the Short Run and Long Run Why the Long Run Supply Curve Might Slope Upward some resource used in production may be available only in limited quantities an increase in demand for some products cannot induce an increase in quantity supplied without also inducing a rise in producers costs firms may have different costs Because these new entrants have higher costs the price must rise to make entry profitable for them marginal firm the firm that would exit the market if the price were any lower Because firms can enter and exit more easily in the long run than in the short run the long run supply curve is typically more elastic than the short run supply curve
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