Chapter 14 sells Market power a firm is said to have market power if it can influence the market price of the good it Competitive market perfectly competitive market a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker o There are many buyers and many sellers in the market o The goods offered by the various sellers are largely the same o Firms can freely enter or exit the market SOMETIMES Average revenue total revenue divided by quantity sold o For all firms average revenue equals the price of the good Marginal revenue the change in total revenue from an additional unit sold o For competitive firms marginal revenue equals the price of the good Cost Curves o Marginal cost curve MC is upward sloping o Average total cost ATC is U Shaped o Marginal cost curve crosses the average total cost curve at the minimum average total cost curve This analysis yields three general rules for profit maximization o If marginal revenue is greater than marginal cost the firm should increase its output o If marginal cost is greater than marginal revenue the firm should decrease its output o At the profit maximizing level of output marginal revenue and marginal cost are exactly equal Because the firm s marginal cost curve determine 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
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