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Firms in competitive market, exit, shut down, AR = MR = Pmarket - Coggle…
Firms in competitive market
Competitive market
market with many buyers and sellers
trading identical products
firms can freely enter or exit market
Revenue of a competitive firm
total revenue
TR = P* Q
average revenue
AR = TR/Q
marginal revenue
TR'q
MR = P for a competitive firm
can keep increasing its output w/o affecting mkt price
only true in competitive market
profit maximization
MR > MC: increase Q to raise P
MR < MC: decreases Q to raise P
MR = MC: prifit max
MC and the firm's supply decision
opposite of profit maximization
MC curve above AVC iss the S-curve
shut down vs exit
shutdown
a
short-run decision
not to produce anything
exit:
long-run decision
to leave the market
a key difference
iff shout down in SR, must pay the FC
if exit in LR, 0 costs
short-run decision to shut down
cost of shutting down
revenue lost = TR
benefit
cost saving = VC
the irrelevance of sunk cost
has already been committed
shouldn't be considered while making decision
SR: sunk cost = fixed cost
a firm's long-run decision
cost of exiting
revenue TR
benefit of exiting
cost: TC
Calculate the total prifit and loss
Market price
positive econ profit
P > ATC min
P = MR = MC
break even point
TR = TC
P = ATC miin
MC = ATC
negative econ point
AVC < P <ATC
P = MR = MC
exit
P <= AVC min
mkt supply: assumptions
all firms have identical cost
never will the price change
entrance: fixed - SR
variable - LR
entry+exit in the long run
earn positive econ profit
new firms enter
SR market curve shift right
P falls, profit falls, slowing entry
incur losses
some firms exit, SR mkt shift left
P increases, decrease losses
0-profit condition
Long-run equilibrium
entry or exit is complete
remaining firms earn 0 econ profit
long-run S curve
horizontal: identical cost
slope upward
produce surplus
= TR - VC
= Profit + FC
=> profit = producer surplus - FC
exit
TR < TC
enter: TR > TC
shut down
TR <VC
P < AVC
AR = MR = Pmarket