Firms in Competitive Markets Flashcards
Characteristics of a competitive market
many buyers and sellers, goods are identical, and firms can freely enter/exit the market
how to solve for total revenue
quantity times price (Q x P)
average revenue
how much revenue a firm receives for the typical unit sold
average revenue equals the price of a good
Marginal revenue
change in total revenue from the sale of each additional unit of output
How to see the change in profit
Comparing marginal revenue and marginal coast of each unit produced
When marginal revenue is greater than marginal cost, increasing the quantity produced raises profit
The market price line is a ____ line
Horizontal
the competitive firm is a price taker (the price of the firm’s output stays the same no matter what)
The market price line equals to the
marginal revenue (in competitive firms only!)
Where does the firm maximize profit?
Where the marginal cost equals the marginal revenue (Qmax)
If marginal revenue is greater than marginal cost…
the firm should increase its output
If marginal cost is greater than marginal revenue
firm should decrease its output
The marginal-cost curve is the competitive firm’s supply curve because it determines what?
the quantity of the good the firm is willing to supply at any price
Shutdown
Short-run decision not to produce anything because of market conditions
if shut down in SR, they must still pay fixed cost
Exit
A long-run decision to leave the market (zero costs)
Pros and Cons in Short-run Decision
Cost of shutting down: revenue loss=total revenue
benefit of shutting down: cost savings equals variable costs
when shut down, total revenue is greater than variable costs
Sunk cost
a cost that has already been committed to and can’t be recovered
pay them regardless of chose
fixed costs=sunk costs, they have to pay it no matter what
Pros and cons of the long-run decision to exit
Cons: revenue loss=total revenue
Benefits of exiting the market: cost savings equal total costs (total revenue is greater than total costs)
When do you enter a market?
when profit is higher than average total cost
Formulas to find profit
Profit=TR-TC
Profit: (P-ATC) x Q
A competitive firm’s short-run supply curve is the ____ cost curve above its ____cost curve
marginal; average-variable
With individual firms…
the quantity of output supplied to the market equals the sum of the quantities supplied by each firm
The supply curve in the long run
the price equals marginal cost (firm maximizes profit)
price also equals average total cost (profit is zero, no incentive to enter or leave the market)
must be horizontal to the price
zero-profit equilibrium
firm’s revenue mist compensate the owners for these opportunity costs
why does the long-run supply curve slope upwards?
resources may be available in limited quantities
firms may have different costs