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Microeconomics - Chapter 7: Firms in Competitive Markets - Coggle Diagram
Microeconomics - Chapter 7: Firms in Competitive Markets
Competitive Market
Characteristics of a perfectly competitive market
There are many buyers & Sellers in the market
The goods offered by the various sellers are largely the same
additional conditions usually considered. Firms can freely enter or exit the market.
This market has many sellers and buyers trading identical products. The actions of any single seller or buyer have negligible impact on market price.
Sellers & Buyers are price takers & accept the price determined by the market.
For producers
It means they can produce and sell as many units as they want. Thus each producer
faces
a perfectly
elastic
demand
curve at the market price for its product
TR for a firm
TR = P x q
Average Revenue
How much revenue firm receives for the typical unit sold.
AR = TR / q
In a competitive market AR =
AR = TR / q = P x q / q = P
Marginal Revenue
Change in TR from an additional unit sold
MR = delta TR / delta q
for a competitive market
MR = P
So profit maximization simplifies to
MC(q) = P (instead of MR)
gives conditions for supply curve
Known as marginal cost pricing
1 more item...
Limitations in short tun and long run in reduction of price
Shutdown
Refers to a short-run decision to halt production when the market price is too low to cover the variable costs of production
Can't avoid FC
FC are sunk costs in short run, costs that has already been committed and can not be removed.
When exiting, consider Only VC is
Operation halt if TR < VC
TR < VC = P < AVC
In the short run, the market has a fixed number of firms. No entry or exit.
Short-Run Market Supply Curve
The short-run market supply curve us the horizontal summation of the individual firms marginal cost curves.
Increase in demand in the short run and long run
Firms don't exit or enter in short run, so price increases.Firms produce more than the efficient scale and profit more.
Eventually market supply increases, and in the long run more firms enter the market.
Then the short run supply curve shifts to the right, the market price decrease, and rive the profit to zero and the price to the minimum of the ATC.
Each firm produces at efficient scale again.
Exit
Refer to long-run decision to leave the a market when the market place price stays lower than the average cost for a long time.
Can avoid FC
When exiting, Considers both VC & FC
IF TR < TC or P < ATC
When Entering
TR > TC or P > ATC
Long Run competitive market supply curve us horizontal at a price equals to the minimum of the average total cost. Each firm operates at is efficient scale.
Long-Run Market Supply: Entry or Exit
If P > ATC, firm profits. More firms enter the market -> The short run market supply shifts to the right, price decreases to the minimum average cost, & profit goes zero.
Long-Run competitive market supply curve is horizontal at a price equal to the minimum of the ATC, each firm operates at its efficient scale.
Why Do Competitive Firms Stay in Business If They Make Zero Profit?
In the zero economic-profit equilibrium, the firm’s revenue not only covers the (explicit) costs but also compensates the owners for the time, money, and other resources they use to keep the business going.
If P < ATC, Firms make loss. Some firms exit the market, the short run market supply shifts to the left, price increases to the minimum average cost, and profit goes to zero.
Why the Long-Run Market Supply Curve Might Slope Upward
Firms may have slightly different costs
Some recourses might be limited, hence increase in production cost.
Marginal Firm
The first firm that enters the market by a slight increase in the price or exits it by a slight decrease. It is the firms that has the highest cost among all the existing firms in market.