Chapter 6: Firms in Competitive Markets - Perfect Market Notes by…
Chapter 6: Firms in Competitive Markets - Perfect Market
Notes by Gritchen (26/06/21)
Market Structure: Number of and distribution size of buyers and sellers in the market for goods and services.
Market: A place where buyers and sellers meet to make transactions.
where there is a large number of buyers and sellers, buying and selling identical products, without any restriction on entry and exit, and having perfect knowledge of the market at the same time.
occurs at the quantity where
marginal revenue equals marginal cost
When MR > MC increase Q
When MR < MC decrease Q
When MR = MC Profit is maximized.
The Revenue of a Competitive Firm
Total revenue for a firm is the selling price times the quantity sold.
Total revenue is proportional to the amount of output.
refer how much revenue a firm receives for the typical unit sold
total revenue divided by the quantity sold.
equals the price of the good
is the change in total revenue from an additional unit sold
Characteristics Competition Market:
Large numbers of buyers and sellers
Homogenous or identical product
Free entry and exit
Short Run - Shut-Down Point
points where the AVC is equal to AR.
a firm will shut down when the price is less than the AVC.
refers costs that have already been committed and cannot be recovered.
when deciding to exit, but ignores them when deciding whether to shut down.
Shut down if TR < VC
Shut down if TR/Q < VC/Q
Shut down if P < AVC
Long run - Exit
refers to a long-run decision to leave the market
A firms exit if:
the revenue it would get from
producing is less than its total cost
Exit if TR < TC
Exit if TR/Q < TC/Q
Exit if P < ATC
A firm will enter:
the industry if such an action would be profitable
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC
The Supply Curve in the Competition Markets
the portion of its marginal-cost curve that lies above average total cost
Short-Run Supply Curve:
The portion of its
marginal cost curve that
lies above average variable cost.
equals the sum of the quantities supplied by the individual firms in the market.
each firm supplies a quantity of output so that its marginal cost equals price
reflects the individual firms’ marginal cost curves.
Long-Run Supply Curve
The marginal cost curve above
the minimum point of its
average total cost curve.
Market Supply with Entry and Exit:
Firms will enter or exit the market until profit is driven to zero.
price equals the minimum of average total cost.
The long-run market supply curve is horizontal at this price
Why Do Competitive Firms Stay in Business
If They Make Zero Profit?
Profit equals total revenue minus total cost
Total cost includes all the opportunity costs of the firm.
In the zero-profit equilibrium, the firm’s revenue compensates the owners for the time and money they expend to keep the business going.