New version page

GWU ECON 1011 - Chapter 12: Firms in perfectly Competitive Markets

Upgrade to remove ads

This preview shows page 1 out of 3 pages.

Save
View Full Document
Premium Document
Do you want full access? Go Premium and unlock all 3 pages.
Access to all documents
Download any document
Ad free experience

Upgrade to remove ads
Unformatted text preview:

Chapter 12: Firms in perfectly Competitive MarketsPerfectly competitive industries- Unable to control the prices of the products they sell- Unable to earn a an economic profit in the long runo Firms in these industries sell identical productso It is easy for new firms to enter these industriesPerfectly Competitive Markets- Must be many buys and many firms, all of which are small relative to the market- Products sold by all firms in the market must be identical- Must be no barriers to new firms entering the markPerfectly Competitive Firm cannot affect the market price- The actions of any single consumer or firm have no effect on the market price- Price taker: a buyer or seller that is unable to affect the market priceMaximizing profit- Profit: total revenue minus total costo Profit= TR – TC- Average revenue: total revenue divided by the quantity of the product soldo AR= TR/Q- Marginal Revenue: the change in total revenue from selling one more unit of a producto MR= change in TR/ change in Q- For a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue- Marginal revenue curve for a perfectly competitive firm is the same as is demand curve- Optimal decisions are made at the margin1. Profit maximizing level of output is where the difference between total revenue and total cost is the greatest2. The profit maximizing level of output is also where marginal revenue equals marginal cost3. Price is equal to marginal revenue only in a perfectly competitive industry**MR = MC, P = MCProfit = (P – ATC x Q) --- ATC= TC/QIllustrating When a Firm is breaking even or Operating at a loss1. P > ATC, which means the firm makes a profit2. P = ATC, which means the firm breaks even (its total cost = its total revenue)3. P < ATC, which means the firm experiences a lossDeciding whether to produce or to shut down in the short run- A firm experiencing a loss has 2 choices1. Continue to produce2. Stop production by shutting down temporarily- Sunk cost: a cost that has already been paid and cannot be recoveredo Treat sunk costs as irrelevant to decision making- As long as a firm’s total revenue is greater than its variable costs, it should continue to produce no matter how large or small its fixed costs areSupply Curve of a Firm in the Short Run-A perfectly competitive firm’s marginal cost curve is its supply curve-If a firm is experiencing a loss, it will shut down if its total revenue is less than its variable costo Total revenue < variable costo (P x Q) < VCo P < AVC-The firm’s marginal cost curve is its supply curve only for prices at or above average variable costs-Shutdown point: the minimum point on a firm’s average variable cost curve o If the price falls below this pint, the firm shuts down production in theshort runEconomic profit: a firm’s revenues minus all its costs, implicit and explicitEconomic loss: the situation in which a firm’s total revenue is less than its total cost, including all implicit costs Long-run competitive equilibrium: the situation in which the entry and exit of firms has resulted in the firm breaking evenLong-run supply curve: a curve that shows the relationship in the long run between market price and the quantity supplied- In the long run, a perfectly competitive market will supply whatever amount of a good consumers demand t a price determined by the minimum point on the typical firm’s average total cost curveo Anything that raises or lowers the costs of the typical firm in the long run will cause the long-run supply curve to shiftConstant cost industries: average costs do not change as the industry expands productionIncreasing cost industries: firm’s costs rise as the industry expands- Long-run supply curve will slop upwardDecreasing cost industries: firm’s costs fall as the industry expands- Long-run supply curve will slope downwardProductive efficiency: the situation in which a good or service is produced at the lowest possible cost- Only consumers benefits from cost reductionsAllocative efficiency: a state of the economy in which production represents consumer preferences- Every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it1. Price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold2. Perfectly competitive firms produce up to the point where the price of the good equal to the marginal cost of producing the last unit3. Firms produce up to the point where the last unit provides a marginal benefitto consumers equal to the marginal cost of producing


View Full Document
Download Chapter 12: Firms in perfectly Competitive Markets
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 12: Firms in perfectly Competitive Markets and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 12: Firms in perfectly Competitive Markets 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?