Chapter+14+(JEM)+-+Firms+in+Competitive+Markets

=Competitive Market= A Competitive Market (Perfectly competitive market), has two characteristics:
 * Many buyers and sellers
 * Goods are similar
 * Firms can enter and exit the market freely

Then what is an example of a **competitive market?** Let's see! Wheat and Milk markets would be an example of competitive market. Why? because there are many buyers and sellers for milk. RIght?Also milk isn't drastically different for each firms, since milk is just milk although there are 2%, 1%, or skim milk. Right? Lastly, you can start milk business, but also you can quit the milk business at any times since no-one binds you of doing it. Right?

That's why these markets are the characteristics of the competitive market.



Now this is the graph that shows the "profit-maximizing" point of the firm. The firms maximizes profit by producing the quantity at which MC=MR



This graph then moves on to the market in the short run. If the firm is producing at the point where P<AVC, then the firm has to shut down to minimize the losses. TR<VC TR/Q<VC/Q  P<AVC



This graph then moves on the market in the long run. If the firm is producing at the point where P<ATC, then the firm has to exit the market to minimize the losses. TR<TC TR/Q<TC/Q  P<ATC





Figure 4 shows the market making profit and Figure 5 shows the market making losses.


 * Why do firms in the competitive market make zero profit in the long run?**

For example, if in the short run the firms do well and make a lot of profit by increase in demand or vice versa (firms do bad and make losses by decrease in demand), then it raises the price thus it creates profit for the firms. (or lowers the price thus creates losses for the firms). However since any firms and enter and exit the market freely, by looking at the market, other firms will join the market to make profits as well. (or exit the market, since they are making losses) Thus increase in supply (more firms) will lower the price and thus make the market back to its equilibrium point. (or fewer supplies will higher the profit)

Quick Quiz!
 * Helpful PPT!**

1) Describe Competitive firm.2) Firms exit market if price is lower than __________ in long run.3) Firms shuts down if price is lower than ____________ in short run. Answers 1) Firms with many sellers and buyers; free enter and exit; the goods provided are similar2) Average Total Cost3) Average Variable Cost