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FIRMS IN COMPETITIVE MARKETS (supply curve (figure 6 short run, figure 7…
FIRMS IN COMPETITIVE MARKETS
competitive market
revenue
AR: TR/Q
MR: DELTA TR/DELTA Q
characteristics
many buyers & sellers
goods are largely =
firms can freely enter/exit
profit maximization & competitive firm's supply curve
MC curve & firm's supply decision
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
if TR < VC
if TR/Q < VC/Q
P < AVC
sunk costs
: when a cost has already been committed and can't be recovered
firm's long run decision to exit/enter market
exit if TR < TC, vice versa
exit if P < ATC, vice versa
exit if TR/Q < TC/Q, vice versa
measuring profit
Figure 5a
Figure 5b
supply curve
short run
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
