Chapter 14: Firms in competitive markets
Perfect competition
- All firms selling identical products
- No barriers to new firms entering or existing the market
- Many buyers and sellers
Revenue for the perfectly competitive firm
Average Revenue = Total revenue/ Quantity
Marginal Revenue = change in total revenue/ change in quantity = PRICE
Total Revenue = Price x Quantity
Marginal Revenue = Average Revenue = Price
For a firms in perfectly competitive market, the demand curve is perfectly elastic
Change in profit = Marginal Revenue - Marginal Cost
Marginal Revenue = Marginal Cost => Maximize Profits
Marginal Cost curve = Supply curve (it shows the quantity supplied by the firm at any given price)
Marginal cost curve determines how much the firm is willing to supply at any given price
Shut down rule in the short run
if Price < Average variable cost
if Total Revenue < Total Variable Cost
Total Revenue = Price x Quantity and Total Variable Cost = Average Variable Cost x Quantity => firms will temporary shut down if the quantity is low
If the firm shut down, it still needs to pay the fixed cost
Entry and exit rules in the long run
Exit if Price < Average Total Cost
Enter if Price > Average Total Cost
Competitive firms with profits and losses in the long run
Profit = (Price - Average Total Cost) x Quantity
Loss = (Average Total Cost - Price) x Quantity
ATC minimized => firms efficiency
Competitive market acts as a price taker
Shut down: a short- run decision to produce nothing for a specific period of time
Fixed cost = sunk cost
Firms will enter or exit the market until profit is driven to 0 => P = minimum of Average Total Cost in the long run
A shift in demand in the short run and long run (see page 318 for more details)
Why the long- run supply curve might slope upwards? (p.319)