Chapter+14+Firms+in+competitve+Markets+JBS

=Chapter 14 Firms in competitve Markets JBS =



 * competitive market**: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker


 * average revenue**: total revenue divided by the quantity sold


 * marginal revenue**: the change in total revenue from an additional unit sold


 * sunk cost**: a cost that has already been committed and cannot be recovered

=Competitive Market's Characteristics: = = =   > 
 * Many buyers and sellers
 * Goods offered are largely the same
 * Actions of single seller/buyer-> negligible impact
 * Price-takers
 * Firms can freely enter or exit the market



=Revenue of a Competitive Firm = = = 

<span style="font-family: Tahoma,Geneva,sans-serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Profit = Total Revenue - Total Cost
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Total Revenue = Quantity * Price
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Total Revenue = Proportional to the Amount of Output

Price of a product doesn't depend on the quantity of output BUT FIXED PRICE!

<span style="font-family: Tahoma,Geneva,sans-serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Average Revenue = TR/Q = P*Q/Q = P ( for all firms!)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Marginal revenue = P for competitive firms

<span style="font-family: Tahoma,Geneva,sans-serif;"> Profit Maximization
=<span style="font-family: Tahoma,Geneva,sans-serif;"> = <span style="font-family: Tahoma,Geneva,sans-serif;">

When M.R > M.C, it raises profit, so they would raise production

When M.C = M.R, maximized profit!



<span style="font-family: Tahoma,Geneva,sans-serif;">Marginal Cost Curve = Competitive Firm's Supply Curve

<span style="font-family: Tahoma,Geneva,sans-serif;"> =<span style="color: #800080; font-family: Tahoma,Geneva,sans-serif;">Short Run's Shut Down and Long Run's Exit = <span style="color: #800080; font-family: Tahoma,Geneva,sans-serif;">


 * <span style="border-collapse: separate; font-family: Tahoma,Geneva,sans-serif;">SHORT RUN decision to SHUT DOWN || <span style="border-collapse: separate; font-family: Tahoma,Geneva,sans-serif;">LONG RUN decision to EXIT ||
 * <span style="border-collapse: separate; font-family: Tahoma,Geneva,sans-serif;">A competitive firm would shut down if P < AVC.

Sunk Cost : a cost that can't be avoided regardless

Ex) Fixed cost when shut down. || <span style="border-collapse: separate; font-family: Tahoma,Geneva,sans-serif;">Exit when P < ATC. Portion above ATC -> long run supply curve

They will enter /exit until the profit is 0! || <span style="font-family: Tahoma,Geneva,sans-serif;"> Profit = (P-ATC) * Q, if P < ATC, no profit!

Decisions about entry and exit in a market depend on incentives facing the owns who could start new firms.

If existing firms are profitable -> incentive to enter: expand # of firms

Increase quantity of good supplied -> drive down prices + profits

VISE VERSA

If P = ATC, the profit = 0 in competitive market, MR=P and if P = MC, maximized profit! When MC = ATC, it has to be in the minumum of ATC, which is Efficient Scale!

Long-run Supply Curve is more elastic than Short-Run Supply Curve.

<span style="font-family: Tahoma,Geneva,sans-serif;"> <span style="color: #ff0000; font-family: Tahoma,Geneva,sans-serif;">Bibliography: <span style="font-family: Tahoma,Geneva,sans-serif;">

http://www.prusnyder.com/u/staticpages/2009/09/multiple-offers_4001.jpg http://www.personal.psu.edu/faculty/d/x/dxl31/econ2/Spring_2000/perfcomp.gif