(BTY)+Chapter+14

=Firms in Competitive Markets =  

The Meaning of Competition
Competitive market (perfectly competitive market): there are three characteristics in competitive market. There needs to be many buyers and sellers and the product sold by many sellers should be identical. And since it is a free market, enter and exit of firms is freely allowed. -buyers and sellers in competitive market are price takers because they agree to the market prices -anyone can freely enter or exit the market  

The Revenue of a Competitive Firm
Average revenue: Total revenue / Quantity -allows the amount of revenue that the firm received for every unit sold -total revenue= P X Q -for firms, Average revenue = price of product Marginal revenue: the change in total revenue / each unit sold -for competitive firms, marginal revenue = price of product <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">

<span style="color: rgb(255, 160, 15); font-family: Arial,Helvetica,sans-serif;">The Marginal Cost Curve and the Firm’s Supply Decision
<span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">-price is horizontal because as previously discussed, firms are price takers. Therefore: <span style="font-family: Arial,Helvetica,sans-serif;">-MR goes beyond MC so increase in production increase profit <span style="font-family: Arial,Helvetica,sans-serif;">-MC is above MR in order to reduce increase in profit <span style="font-family: Arial,Helvetica,sans-serif;">-Quantity Max is where the price line meets MC curve
 * <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;">P equals AR equals MR

<span style="font-family: Arial,Helvetica,sans-serif;">- To maximize profit, MR = MC <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;">  <span style="font-family: Arial,Helvetica,sans-serif;">-Since MC decides the firm’s willingness to supply, MC is firm’s supply curve <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">
 * When MR > MC, quantity should increase
 * <span style="font-family: Arial,Helvetica,sans-serif;">When MR < MC, quantity should decrease

<span style="font-family: Arial,Helvetica,sans-serif;">The Firm’s Short-Run Decision to Shut Down
<span style="font-family: Arial,Helvetica,sans-serif;">-shut down is when short run firms decide not to do any actions for a while <span style="font-family: Arial,Helvetica,sans-serif;">-Exit is when long run firms decide to completely disappear in the market. <span style="font-family: Arial,Helvetica,sans-serif;">-Most firms cannot do anything to short run’s fixed cost <span style="font-family: Arial,Helvetica,sans-serif;">-In short run, when firms decide to shut down the market, the firm still has to have fixed cost in their consideration <span style="font-family: Arial,Helvetica,sans-serif;">-firms usually shut down when the revenue produced is less than the variable cost <span style="font-family: Arial,Helvetica,sans-serif;">-supply curve of short run firm in competitive market is the amount of its MC. <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">*sunk cost: decision-made cost that it cannot be fixed <span style="font-family: Arial,Helvetica,sans-serif;">
 * <span style="font-family: Arial,Helvetica,sans-serif;">SHUT DOWN when TR < VC
 * <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">TR/Q < VC/Q
 * <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">P < AVC

<span style="font-family: Arial,Helvetica,sans-serif;">The Firm’s Long-Run Decision to Exit or Enter a Market
<span style="font-family: Arial,Helvetica,sans-serif;">-variable cost AND fixed costs are all lost in long run’s exit <span style="font-family: Arial,Helvetica,sans-serif;">-when the revenue is less than the total cost, firms exit >> <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">
 * <span style="font-family: Arial,Helvetica,sans-serif;">EXIT when TR < TC
 * <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">TR/Q < TC/Q
 * <span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">P < ATC (Enter when P > ATC)

<span style="font-family: Arial,Helvetica,sans-serif;">Measuring Profit in Our Graph for the Competitive Firm
> <span style="font-family: Arial,Helvetica,sans-serif;">= (TR/Q – TC/Q) X Q > <span style="font-family: Arial,Helvetica,sans-serif;">= (P – ATC) X Q
 * <span style="font-family: Arial,Helvetica,sans-serif;">Profit= TR- TC

<span style="font-family: Arial,Helvetica,sans-serif;">Competitive firm’s long run supply curve <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">

-MC is the supply curve <span style="font-family: Arial,Helvetica,sans-serif;">-MC is over ATC <span style="font-family: Arial,Helvetica,sans-serif;">-when P falls below ATC, firm should exit <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;"> Profit as the area between P and ATC <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;">

<span style="font-family: Arial,Helvetica,sans-serif;">

<span style="font-family: Arial,Helvetica,sans-serif;">The Short Run: Market Supply with a Fixed Number of Firms <span style="font-family: Arial,Helvetica,sans-serif;">
<span style="font-family: Arial,Helvetica,sans-serif;">-When P is above AC, MC curve equals supply curve <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;">

<span style="font-family: Arial,Helvetica,sans-serif;">The Long Run: Market Supply with Entry and Exit
<span style="font-family: Arial,Helvetica,sans-serif;">-based on incentives, firms have it to enter the market <span style="font-family: Arial,Helvetica,sans-serif;">-increase in Q, decrease in P and profits <span style="font-family: Arial,Helvetica,sans-serif;">-when loosing profit, firms exit <span style="font-family: Arial,Helvetica,sans-serif;">-firms that did not exit the market must make 0 profits <span style="font-family: Arial,Helvetica,sans-serif;">Profit= (P - ATC) X Q <span style="font-family: Arial,Helvetica,sans-serif;">-when P = ATC, entry and exit process <span style="font-family: Arial,Helvetica,sans-serif;">-long run equilibrium in competitive market has functioning efficient scale <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;"> <span style="font-family: 맑은 고딕;"><span style="font-family: Arial,Helvetica,sans-serif;">

A competitive market needs to have many buyers and sellers and the product sold by many sellers should be identical. And since it is a free market, enter and exit of firms is freely allowed. The price of a competitive market is formed when MC equals MR. Firms make different decisions depending on whether they’re in long run or short run.
 * Summary**

Questions 1. Price equals _and _ 2. When MR > MC, quantity should _ <span style="font-family: Arial,Helvetica,sans-serif;"> When MR < MC, quantity should _ 3. In _shut down, _is considered and in _ exit, fixed cost and variable cost are both considered. 4. For competitive firms, marginal revenue = price of product (T/F) 5. Define <span style="font-family: Arial,Helvetica,sans-serif;">Competitive market

Answers 1. Average Revenue and Marginal Revenue 2. increase, decrease 3. Short run, fixed cost, long run 4. T 5. there are three characteristics in competitive market. There needs to be many buyers and sellers and the product sold by many sellers should be identical. And since it is a free market, enter and exit of firms is freely allowed.

pictures from Mankiw's Principles of Microeconomics ch.14