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