Step+14.+Firms+in+Competitive+Markets-+Sarah

=Firms in Competitive Markets =

**__Introduction__**  A market has many sellers with similar products. In Step 14, we'll try to analyze the decisions that lie behind the supply curve in a competitive market.

__**What We Will Learn**__  -Competitive Firms and Competitive Market -Profit Maximization and a Firm's Supply Curve -A Firm's Short and Long Decisions -Shift and Slopes in Demand Curves

__**Key Terms**__  -competitive market: **m**arket with many buyers and sellers trading identical goods -average revenue: total revenue divided by the quantity sold -marginal revenue: change in total revenue from an additional unit sold -sunk cost : cost already been decided and should not be considered in making decisions

 __**Topics**__


 What is a Competitive Market? A perfectly competitive market has the following characteristics: i. There are many buyers and sellers in the market ii. The goods offered by the various sellers are largely the same (homogenous) iii. Firms can freely enter or exit the market

As result of its characteristics, perfectly competitive market has following outcomes: i. The actions of any single buyer or seller in the market has negligible impact on the market price ii. Each buyer and seller takes the market price as given

A competitive market has many buyers and sellers trading identical products (perfect substitutes) so that each buyer and seller is a price taker (accepting market price) 
 * Total revenue for a firm is the selling price times the quantity sold TR = P x Q
 * Average revenue tells us how much revenue a firm receives for the typical unit sold AR = TR / Q = Price
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">In all firms, average revenue equals the price of the good
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Marginal revenue is the change in total revenue from an additional unit sold MR = Change in TR / Change in Q = Price
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">For competitive firms, marginal revenue equals the price of the good

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> **2) Profit Maximization**
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost. Profit maximization occurs at the quantity where marginal revenue = marginal cost

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> 3) A Firm's Short-Run Decision to Shut Down & Sunk Costs
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> Shutdown—refers to a short-run decision not to produce anything during a specific period of time b/c of current market conditions. The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down.

Sunk costs—costs that have already been committed and cannot be recovered (Opposite of opportunity costs) The firm shuts down if the revenue it gets from producing is less than the variable cost of production

Shut Down… o If TR < VC o If TR/Q < VC/Q o If P < AVC

Portion of marginal-cost curve that lies above average variable cost is the competitive firm’s short-run supply curve

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> 4) A Firm's Long-Run Decision to Exit or Enter a Market
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> Exit—refers to a long-run decision to leave the market In the long run, the firm exits if the revenue it would get from producing is less than its total cost <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">o If TR < TC o If TR/Q < TC/Q o If P < ATC
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Exit…

A firm will enter the industry if such an action would be profitable <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">o If TR > TC o If TR/Q > TC/Q o If P > ATC
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Enter…

Competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Profit = (P – ATC) X Q

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> 6) Supply Curve in a Competitive Market
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> Short-Run Supply Curve—the portion of its marginal cost curve that lies above average variable cost Long-Run Supply Curve—the marginal cost curve above the minimum point of its average total cost curve

Market supply = sum of the quantities supplied by the individual firms in the market

The Short Run: Market Supply with a Fixed Number of Firms i. For any given price, each firm supplies a quantity of output so that its marginal cost equals price ii. The market supply curve reflects the individual firms’ marginal cost curves

The Long Run: Market Supply with Entry and Exit i. Firms will enter or exit the market until profit is driven to zero ii. In the long run, price equals the minimum of average total cost iii. The long-run market supply curve is horizontal at this price iv. At the end of the process of entry and exit, firms that remain must be making zero economic profit v. The process of entry and exit ends only when price and average total cost are driven to equality vi. Long-run equilibrium must have firms operating at efficient scale

A Shift in Demand in the Short Run and Long Run i. An increase in demand raises price and quantity in the short run ii. Firms earn profits b/c price now exceeds average total cost

Why the Long-Run Supply Curve Might Slope Upward i. Some resources used in production may be available only in limited quantities ii. Firms may have different costs iii. Marginal firm—firm that would exit the market if the price were any lower iv. Because firms can enter and exit more easily in the long run than in the short run, the long-run supply curve is typically more elastic than the short-run supply curve

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"><span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> __**Conclusion**__ A market has many different sellers. Make sure you know when the firms shut down and exit the market and how they earn zero economic profit in the long run:)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"><span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> __**Quiz**__ Why Do Competitive Firms Stay in Business If They Make Zero Profit? i. Profit = total revenue – total cost Total cost includes all the opportunity costs of the firm ii. In the zero-profit equilibrium, the firm’s revenue compensates the owners for the time and money they expend to keep the business going

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"><span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> __Sources__ Mankiw, Gregory N. //Principles of Microeconomics//. 4th ed. Print. http://rapidrevision.co.uk/business-studies-student/files/2009/12/image6.png