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Chapter 7- Firms in competitive markets - Coggle Diagram
Chapter 7- Firms in competitive markets
Perfectly competitive market
There are many buyers & sellers
The goods that are offered in market is the same
firms can freely enter or exit
No legal Barries, or cost to enter or exit
Buyers & seller are price takers, and accept the price determined
For producers, they can produce & sell as much as they want. Each producer faces a perfectly elastic demand
The revenue in competitive market
TR= p * q
Average revenue: tells us how much revenue firm receive typically
AR= TR/Q
AR= TR/q = P * q/q = P
AR is = to price in competitive market
The average revenue in any market with a single price is the market price
Marginal revenue
the
change
in revenue from an
additional
unit sold
MR=Delta TR/ Delta Q
Also MR=P
Profit maximization and supply curve
Firms profit maximization condition MC(q)=P
MC curve
represents
the supply curve
Marginal cost pricing
Is the fully efficient choice of the firm, which provides benchmark behaviour of firm
Supply curve and its limitations
A competitive firm supplies quantity at MC(q)=P
Shutdowns
referes to short-run decision to halt production when price is too low
Exits
the long-run decision to exit when price is lower than ATC
Firm's decision and sunk costs
it defers because firm cannot avoid FC in short-run but can in long-run.
Sunk costs
Costs that have been already committed and cannot be returned, EX: pre-paid Rent
We must ignore the sunk costs economists say
firm
ignores
its
FC
as they are sunk in the
Short-run
when deciding to shutdown, but will
consider
in
Long-run
to exit
Firms short-run decision to shutdown
Only considers the variable cost in short run. thus halts if revenue < VC of production
TR<VC=TR/q<VC=q
Price < AVC firm must shutdown
Shutdown at the minimum of AVC in short-run
The short-run market supply curve is the horizontal summation of individual MC curves
Firms long-run decision to exit
Firm considers
both
variable and FC in
long-run
. Thus
exits
when
revenue
<
total cost
TR<TC. ---> TR/q<TC/q
P< ATC
Firm exits as soon as price < minimum ATC
In LR, it is possible to exit and enter.
Long run decision: entry & Exit
Long run supply curve is horizontal
If market price is > minimum ATC, firm makes profit. there is incentive for firms to join, supply curve shifts right, price decreases to Minimum ATC, profit goes to zero
If market price is < minimum ATC, there is losses, firms exit market supply shifts to left price increase to minimum ATC, profit goes to zero
Firms enter & exit market until profit is zero in LR
In free competitive market, price = minimum ATC in LR
The market supply curve in Long-run
at the end of entry/exit, firms that remain must make 0 economic profit
1 more item...
Effects of increase in demand in SR & LR
4 more items...
Why the LR Market supply curve slope upward.
4 more items...
The long-run competitive market supply curve is horizontal at the price = ATC
Each firm
operates at efficient scale
Market supply= sum of all firms supply curve