Ch.14+Firms+in+Competitive+Markets

[|*perfect competitive market]
 * Many Buyers & Sellers
 * Similar Goods
 * Free Entry

In a perfectly competitive market, price and quantity are driven by the demand curve and the supply curve. It is the same as the typical market we had been learning. The price and quantity of the product will be at the equilibrium point. Since the invisible hand decides the price and quantity of this product, the individual firms are price takers in the economy.

The Revenue of a Competitive Firm

 * AR (Average Revenue): Total Revenue / Quantity


 * MR (Marginal Revenue): Change in Total Revenue / Change in Quantity

In a competitive firm, both AR and MR are equal to price. Why?

Total Revenue = Price * Quantity, so

AR = Price * Quantity / Quantity = **Price**

MR = Change in Price * Quantity / Quantity = (since Quantity does not change)
 * Price**

Since this is the case,


 * Price = AR = MR**



Profit = (Price - ATC) * Quantity

*[|Profit]

media type="youtube" key="YLK3emHpkdk" width="425" height="350" [|*Perfect Competition]

competitve market**: market with many buyers and sellers trading identical goods
 * __Key Concepts__
 * 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

Questions 1. What is the cost that has already been decided to be paid? 2. What are the other two revenues that are equal to price in the competitve market?

Answers 1. Sunk cost 2. average revenue and marginal revenue