FIRMS IN COMPETITIVE MARKETS

competitive market

revenue

characteristics

many buyers & sellers

goods are largely =

firms can freely enter/exit

AR: TR/Q

MR: DELTA TR/DELTA Q

profit maximization & competitive firm's supply curve

supply curve

MC curve & firm's supply decision

Figure 1 figure 1

if MR > MC, output should be increased

if MC > MR, output should be decreased

if MR = MC, profit max

MC curve = competitive firm's supply curve

firm's short run decision to shut down

firm's long run decision to exit/enter market

measuring profit

if TR < VC

if TR/Q < VC/Q

P < AVC

sunk costs: when a cost has already been committed and can't be recovered

exit if TR < TC, vice versa

exit if P < ATC, vice versa

exit if TR/Q < TC/Q, vice versa

Figure 5a figure 5a

Figure 5b figure 5b

figure 6 short run

figure 7 long run
eventually, the number of firms in the market adjusts so price = minumum of ATC and there are enough firms to satisfy all demand at this price

firms stay business although they make 0 profit because accountants don't count opportunity costs

shift in demand in short and long run:
(1) a market begins in long-run equilibrium with firm earning 0
(2) an increase in demand raise price leading to short-run profits
(3) profits induce entry, supply increases, price falls, restoring long-run equilibrium

why long run supply curve might slope upward
(1) some resources used in production may be available in limited quantities
(2) firms may have different costs