Chapter+14+FIRMS+IN+COMPETITIVE+MARKET+Erica

=What is a Competitive Market? = = =  Let's define.

KEY CONCEPTS
 * 1) Average Revenue: Total Revenue / Q
 * 2) Marginal Revenue: The change in TR from an marginal unit sold.
 * 3) Sunk Cost: Money that is already spent, and can't be recovered.

 **__"Perfect Competition" = "Competitive Market"__**  media type="youtube" key="7lhX78vlHSY" height="344" width="425" BASIC INFO. ABOUT FIRMS IN COMPETITIVE MARKET!! :) CREDITS TO [|pajholden]  Revenue of a Competitive Firm Firm in a competitive market wants to maximize product just like other firms. (FYI: Profit=Total Revenue-Total Cost)
 * 1) Many Buyers: They want to pay lower cost. Their willingness to pay is max. (I can pay this much for this product)
 * 2) Many Sellers: They want to get higher cost as possible. Their willingness to sell is min. (I need to get this much to earn profit)
 * 3) Homogeneous product (Products' quality are the same)
 * 4) Free enter/exit

(Q) || Price (P) || Total Revenue (TR=P*Q) || Average Revenue (AR=TR/Q) || Marginal Revenue (MR=delta TR/ delta Q) || || 6 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;"> || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">12 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q1~Q2: 6 || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">18 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q2~Q3: 6 || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">24 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q3~Q4: 6 || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">30 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q4~Q5: 6 || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">36 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q5~Q6: 6 || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">42 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q6~Q7: 6 || || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">48 || <span style="font-family: Georgia,serif;">6 || <span style="font-family: Georgia,serif;">Q7~Q8: 6 || <span style="font-family: Georgia,serif; font-size: 120%;"> Average revenue in the second last column tells us how much revenue the farm receive for the each product sold. Marginal Revenue in the last column tells us how much additional revenue the seller receive if it increases production by 1. For all firms, average revenue=price of the good For competitive firms, Marginal Revenue=Price of the good.
 * <span style="font-family: Georgia,serif;">Quantity
 * <span style="font-family: Georgia,serif;">1
 * <span style="font-family: Georgia,serif;">2
 * <span style="font-family: Georgia,serif;">3
 * <span style="font-family: Georgia,serif;">4
 * <span style="font-family: Georgia,serif;">5
 * <span style="font-family: Georgia,serif;">6
 * <span style="font-family: Georgia,serif;">7
 * <span style="font-family: Georgia,serif;">8

<span style="font-family: Georgia,serif; font-size: 120%;">
<span style="font-family: Georgia,serif; font-size: 120%;">Quantity of output is decided where Marginal revenue equals Marginal cost because MR for a competitive firm=market price. Therefore firm's MC is it's Supply Curve.

<span style="font-family: Georgia,serif;"> =<span style="font-family: Georgia,serif;"> Profit Maximization and the Competitive Firm's Supply Curve. = <span style="font-family: Georgia,serif;"> There are four types of business system: Perfect competition, monopoly, monopolistic competition, Oligopoly. Perfect competition is the only chapter where we have to draw a __//**SIDE BY SIDE GRAPH**//__ for market and firms. When Price is greater than Average Total Cost, the firm is making a profit. Eventually, in the long run, the firm's sellers will increase because it giver motivation to other people to ENTER the market and make profit. In the long run after other new firms enter, profit will be "0" because the newly entered firms will eat up all the profit.

When Price is LESS than Average Total Cost, firms are making loss in the market. Therefore, many firms will exit the market to avoid more loss. Therefore, loss will decrease as more firms exit. In the longrun, number of sellers will decrease and Supply curve shifts left (MARKET GRAPH).

BUT WHY in the LONG RUN, all perfectly competitive firms have a "0" profit? It is because of FREE ENTER/EXIT characteristics of perfectly competitive firm. All firm owners can enter when the market is making a profit OR exit when the firms is making losses! :) When profit becomes "0" we call that profit **BREAKS EVEN!**

media type="youtube" key="YLK3emHpkdk" height="344" width="425"media type="youtube" key="7RnIXc1ub1k" height="344" width="425" IF YOU STILL DON'T UNDERSTAND THE GRAPH OF THE COMPETITIVE MARKET (PERFECT COMPETITION), MAYBE, THIS MIGHT HELP YOU! :) CREDITS TO [|richardmckenzie] <span style="font-family: Georgia,serif;">

On page 298-299 in our textbook, there is a complicated equation where firms enter, exit, shutdown, and work at the market. DO NOT TRY TO MEMORIZE IT, KNOW IT! I made a ONE LINE equations for some of you who don't get this.

=<span style="font-family: Georgia,serif; color: rgb(0, 194, 47);"><span style="color: rgb(48, 20, 255);">P1<AVC< P2<span style="color: rgb(235, 0, 0);"><ATC<P3 = //BASICALLY, Blue part is the SHORT RUN. When P<AVC, then the firm shuts down. When P>AVC, then the firms works.

The Red part is the firm in the LONG RUN. When P<ATC, the firm exits. When P>ATC, the firm enters.// <span style="font-family: Georgia,serif;"> Demand in Perfectly Competitive market! Increase in demand raises prices and leads to profits. Decrease in demand lowers prices and leads to losses.
 * In the SHORT RUN

the number of firms adjusts to drive the market back to the zero-profit equilibrium. BECAUSE Perfectly competitive market allows firms to ENTER and EXIT freely.
 * In the LONG RUN

=BRIEF SUMMARY=

Characteristics of the Perfect competition is that Firms aren't able to make profit in the long run because of FREE ENTER AND EXIT. To maximize profit, firm chooses Q where MR=MC. Also //When P<AVC, then the firm shuts down.When P>AVC, then the firms works. When P<ATC, the firm exits.When P>ATC, the firm enters.//
 * 1) <span style="font-family: Georgia,serif;">Many Buyers: They want to pay lower cost. Their willingness to pay is max. (I can pay this much for this product)
 * 2) <span style="font-family: Georgia,serif;">Many Sellers: They want to get higher cost as possible. Their willingness to sell is min. (I need to get this much to earn profit)
 * 3) <span style="font-family: Georgia,serif;">Homogeneous product (Products' quality are the same)
 * 4) <span style="font-family: Georgia,serif;">Free enter/exit

=Quick QUIZ= 1. Why in the long run can't firms in competitive market make profit? (PROFIT "0") 2. What are the characteristics of the perfect competition? 3. Which of the following statements is correct? 4. In a firm in a perfectly competitive market, the price of the good is always _? (fill in the blank)
 * 1) A competitive firm is a price maker
 * 2) A competitive firm is a price taker

Answer: 1. Because of FREE ENTER AND EXIT 2. <span style="font-family: Georgia,serif;">3. 2 4. equal to MR.
 * 1) <span style="font-family: Georgia,serif;">Many Buyers: They want to pay lower cost. Their willingness to pay is max. (I can pay this much for this product)
 * 2) <span style="font-family: Georgia,serif;">Many Sellers: They want to get higher cost as possible. Their willingness to sell is min. (I need to get this much to earn profit)
 * 3) <span style="font-family: Georgia,serif;">Homogeneous product (Products' quality are the same)
 * 4) <span style="font-family: Georgia,serif;">Free enter/exit