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    Chapter 6 22

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    qwerty
    A competitive market is characterized by many small firms selling identical products. For a competitive firm, revenue is determined solely by the market price and quantity sold, as it is a price taker. A competitive firm maximizes profit by producing at the quantity where marginal revenue equals marginal cost, with marginal revenue equal to the market price. In the short run, a firm will shut down if price is below average variable cost, and in the long run it will exit the market if price is below average total cost.

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    Chapter 6 22

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    qwerty
    40 views13 pages
    A competitive market is characterized by many small firms selling identical products. For a competitive firm, revenue is determined solely by the market price and quantity sold, as it is a price taker. A competitive firm maximizes profit by producing at the quantity where marginal revenue equals marginal cost, with marginal revenue equal to the market price. In the short run, a firm will shut down if price is below average variable cost, and in the long run it will exit the market if price is below average total cost.

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    A competitive market is characterized by many small firms selling identical products. For a competitive firm, revenue is determined solely by the market price and quantity sold, as it is a price taker. A competitive firm maximizes profit by producing at the quantity where marginal revenue equals marginal cost, with marginal revenue equal to the market price. In the short run, a firm will shut down if price is below average variable cost, and in the long run it will exit the market if price is below average total cost.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    40 views13 pages

    Chapter 6 22

    Uploaded by

    qwerty
    A competitive market is characterized by many small firms selling identical products. For a competitive firm, revenue is determined solely by the market price and quantity sold, as it is a price taker. A competitive firm maximizes profit by producing at the quantity where marginal revenue equals marginal cost, with marginal revenue equal to the market price. In the short run, a firm will shut down if price is below average variable cost, and in the long run it will exit the market if price is below average total cost.

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    of 13

    FIRMS IN

    COMPETITIVE
    Prepared by: Ms. Dang Gannaban
    MARKETS

    WHAT IS A COMPETITIVE
    MARKET?

    COMPETITIVE MARKET a market with


    many buyers and sellers trading identical
    products so that each buyer and seller is
    a price taker.
    Three CHARACTERISTICS:
    There are many buyers and sellers in the

    market.
    The goods offered by the various sellers are
    largely the same.
    Firms can freely enter or exit the market.

    THE REVENUE OF A COMPETITIVE FIRM


    QUANTITY
    (Q)

    PRICE
    (P)

    TOTAL REVENUE
    (TR = P x Q)

    AVERAGE
    REVENUE
    (AR = TR / Q)

    1 gallon

    $6

    $6

    $6

    MARGINAL
    REVENUE
    (MR = TR / Q)

    6
    2

    12

    6
    6

    18

    6
    6

    24

    6
    6

    30

    6
    6

    36

    6
    6

    42

    6
    6

    48

    6
    6

    AVERAGE REVENUE total revenue


    divided by the quantity sold.

    MARGINAL REVENUE the change in


    total revenue from an additional unit
    sold.

    Quick Quiz:

    When a competitive firm doubles the


    amount it sells, what happens to the
    price of its output and its total revenue?

    PROFIT MAXIMIZATION AND


    THE COMPETITIVE FIRMS
    SUPPLY CURVE
    MAXIMIZATION: A NUMERICAL EXAMPLE

    TR

    TC

    PROFIT
    (TR-TC)

    O gallons

    $0

    $3

    -$3

    1
    2
    3
    4
    5
    6
    7
    8

    6
    12
    18
    24
    30
    36
    42
    48

    5
    8
    12
    17
    23
    30
    38
    47

    MR

    MC

    CHANGE IN PROFIT
    (MR MC)

    $6

    $2

    $4

    -1

    -2

    -3

    1
    4
    6
    7
    7
    6
    4
    1
    6

    THREE GENERAL RULES FOR


    PROFIT MAXIMIZATION:

    If marginal revenue is greater than


    marginal cost, the firm should increase
    its output.
    If marginal cost is greater than marginal
    revenue, the firm should decrease its
    output.
    At the profit-maximizing level of output,
    marginal revenue and marginal cost are
    exactly equal.

    THE FIRMS SHORT-RUN DECISION


    TO SHUT DOWN

    SHUT DOWN refers to a short-run


    decision not to produce anything during a
    specific period of time because of current
    market conditions.
    EXIT refers to a long-run decision to
    leave the market
    Shut down if TR < VC
    Shut down if TR/Q < VC/Q
    Shut down if P < AVC

    SUNK COST a cost that has already


    been committed and cannot be
    recovered.

    THE FIRMS LONG RUN DECISION


    TO EXIT OR ENTER A MARKET

    Exit if TR < TC

    Exit if TR/Q < TC/Q

    Exit if P < ATC

    Enter if P > ATC

    SUMMARY:

    Because a competitive firm is a price taker,


    its revenue is proportional to the amount of
    output it produces. The price of the good
    equals both the firms average revenue and
    its marginal revenue.
    To maximize profit , a firm chooses a quantity
    of output such that marginal revenue equals
    marginal cost. Because marginal revenue for
    a competitive firm equals the market price,
    the firm chooses quantity so that price equals
    marginal cost. Thus, the firms marginal cost
    curve is its supply curve.

    SUMMARY:

    In the short run when a firm cannot recover its fixed


    costs, the firm will choose to shut down temporarily if
    the price of good is less than average variable cost. In
    the long run when the firm can recover both fixed and
    variable costs, it will choose to exit if the price is less
    than average total cost.

    In a market with free entry and exit, profits are driven to


    zero in the long run. In this long-run equilibrium, all
    firms produce at the efficient scale, price equals the
    minimum of average total cost, and the number of firms
    adjusts to satisfy the quantity demanded at this price.

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