Chapter(14:(Firms(in(Competitive(Markets((What(is(a(Competitive(Market:(The(meaning(of(Competition:(9 competitive)market9(market(with(many(buyers(&(sellers(trading(identical(products(so(that(each(buyer(&(seller(is(a(price(taker(o there(are(many(buyers(and(sellers(in(the(market(o the(goods(offered(by(the(various(sellers(are(largely(the(same(o firms(can(freely(enter/exit(the(market(The(Revenue(of(a(Competitive(Firm:(9 average)revenue9(total(revenue(divided(by(the(quantity(sold(o (PxQ)/Q=(P(9 marginal)revenue9(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:(Marginal9Cost(Curve(and(the(Firm’s(Supply(Decision:((9 If marginal revenue is greater than marginal cost, the firm should increase its output 9 If marginal cost is greater than marginal revenue, the firm should decrease its output 9 At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal Firm’s Short-Run Decision to Shut Down: 9 Shutdown- short-run decision not to produce during a period of time because of current market conditions 9 Exit- long-run decision to leave the market 9 firm that shuts down temporarily still has to pay its fixed costs 9 a firm that exits the market does not have to pay any costs at all 9 firm shuts down if the revenue that it would get from producing is less than its variable costs of production 9 TR < VC (total revenue less than variable cost) 9 TR/Q < VC/Q (revenue/quantity less than variable cost/quantity) 9 P < AVC (price less than average variable cost) Measuring Profit in out Graph for the Competitive Firm: 9 Profit = TR – TC 9 Profit = (TR/Q – TC/Q) xQ 9 Profit= (P-ATC) xQSupply 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 9 firms that remain in the market must be making zero economic profit; profit=(P-ATC)xQ 9 process of entry and exit ends only when price and average total cost are driven to equality 9 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: 9 some resource used in production may be available only in limited quantities 9 an increase in demand for some products cannot induce an increase in quantity supplied without also inducing a rise in producers’ costs 9 firms may have different costs 9 Because these new entrants have higher costs, the price must rise to make entry profitable for them 9 marginal firm–the firm that would exit the market if the price were any lower 9 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
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