Chapter 14 Flashcards
Firms in competetive markets
Competetive market
A market with many buyers and sellers trading identical products, where each buyer and seller is a price taker.
Revenue
Total revenue is calculated as Price × Quantity; marginal revenue equals the market price.
Marginal revenue
The additional revenue a firm earns from selling one more unit of output; in competitive markets, MR equals the price.
Profit maximization
A competitive firm maximizes profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR), or P = MC in perfectly competitive markets.
Short-run supply decision
In the short run, a firm will produce as long as price is greater than or equal to average variable cost (P ≥ AVC); otherwise, it will shut down temporarily.
Shutdown point
The price below which a firm’s revenue does not cover variable costs, making it optimal to temporarily stop production (P < AVC).
Sunk cost
A cost that has already been incurred and cannot be recovered; irrelevant to the decision of whether to continue operating.
Long-run supply decision
In the long run, firms enter or exit the market until economic profit is zero; they exit if price is below average total cost (P < ATC).
Zero economic profit condition
In a competitive market’s long-run equilibrium, firms earn zero economic profit as price equals average total cost (P = ATC).
Short-run market supply curve
The horizontal sum of individual firms’ marginal cost curves above AVC; shows the quantity supplied by the market at different prices.
Long-run market supply curve
Typically horizontal if firms have identical costs and free entry and exit; may slope upward if firms have differing costs.
Economic profit
Total revenue minus total costs, including both explicit and implicit costs; positive economic profit encourages new firms to enter the market.
Entry and exit in the long run
Firms enter a market when existing firms earn positive economic profit, and exit when firms incur losses, driving the market toward zero economic profit.
