Chapter 14 Firms In Competitive Markets Flashcards
Perfect Competition
- Many buyers and many sellers
- The goods offered for sale are largely the same
- Firms can freely enter or exit the market.
😈 Because of one and two, each buyer and seller are considered PRICE TAKERS.
Total Revenue
Price • Quantity
Average Revenue
Total Revenue / Quantity = Price
Marginal Revenue
🔺Total Revenue / 🔺 Quantity
Marginal Revenue = Price (MR=P)
A competitive firm can keep increasing its output without affecting the market price.
So each one unit increase in Q causes revenue to rise by P.
MR = P is only true for firms in competitive markets.
Profit Maximization
Marginal Revenue = Marginal Cost
What needs to happen when MR
Quantity needs to be reduced to maximize profit
What needs to happen when MR>MC?
Quantity needs to be increased to maximize profit.
Shutdown
A short run decision not to produce anything because of market conditions.
- Earn no Revenue when shut down
- Still need to pay FC when shut down
Exit
A long run decision to leave the market.
- Zero costs incurred if a firm exits.
When will a firm shutdown?
When TR < VC
Or in other words,
When P < AVC
By looking at a graph, how would you know if you are operating in the short run or not?
When the ATC curve is above the AVC.
Random Mani Thought
“I’m shutting down if I can’t even cover my variable costs .. duh, I can’t afford staying here!”
Random Mani Thought
“Dang, I still have to pay my fixed costs if I shutdown.. that’s a sunk cost that I can’t avoid.”
Sunk Cost
A cost that has already been committed and cannot be recovered.
