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FIRMS IN COMPETITIVE MARKET - Coggle Diagram
FIRMS IN COMPETITIVE MARKET
Qdd is the amount of a good that buyers are willing & able to purchase
Other things equal
Qdd fall, price rise
Qss is the amount of a good that sellers are willing & able to sell
Other things equal
Qss rise, price rise
Types of costs
Average costs
AFC
AFC = TFC/Q
AVC
AVC = TVC/Q
ATC
AC = TC/Q
Alternatively ATC = AFC + AVC
Marginal cost
Change in TC/change in Q
MR = Change in TR/change in Q
A market is a group of buyers & sellers of a particular good @ service
Competitive market's characteristics
Many buyers & sellers in the market
Homogeneity of output
No barriers to entry @ exit
Perfect information
Buyer & seller is a price taker
TR = (P x Q)
AR = TR/Q
Telling how much revenue a firm receives for the typical unit sold
AR = P
AR = TR/Q = P x Q/Q = P
MR is the change in total revenue from an additional unit sold
MR = Change in TR/change in Q
Profit maximization
Maximize profit @ minimize loss
Produce quantity that maximizes the diff btw TR & TC
Equilibrium & types of profits
Supernormal
Normal
Subnormal
When MR > MC, increase Q to max profit
When MR < MC, decrease Q to max profit
When MR = MC = Profit is max
Short run shutdown condition
TR < TVC
TR/Q < TVC/Q @ (AR<AVC)
P < AVC
A short-run decision not to produce anything during a specific period of time bcs of current market conditions
The amount of capital employed is fixed
Exit refers to a long-run decision to leave the market
All factors of production are variable
Firms may enter or leave the industry
Sunk costs
When decide to exit
Costs that have already been spent & can't be recovered
Importance
Creates a barrier to entry
Competitive firm's SS curve & market SS curve in the SR
The portion of MC curve that lies above AVC is the competitive firm's short-run SS curve
Supplies a Q of output so MC = P
The market SS curve reflect the individual firms' MC curves by summing the Q supplied by the individual firms in the market
Long run equilibrium of a competitive firm & industry
Enter if TR > TC ( supernormal profit)
Enter if AR (TR/Q) > AC (TC/Q)
Enter if P > AC
Exit if TR < TC (subnormal profit)
Exit if TR/Q < TC/Q (AR<AC)
Exit if P < ATC
Economic profit
Profit = TR - TC
TC includes all the opportunity costs of the firm
TC includes explicit & implicit costs
Diff btw SR & LR SS curve in a competitive firm
SR SS curve
MC curve lies above AVC
LR SS curve
MC curve above min point of its ATC curve
Firms will enter @ exit until profit 0
P = min of ATC