CHAPTER+14

= Firms in Competitive Markets = = = 

Table of Content: 1. Title 2. Intro 3. Content 4. Conclusion 5. Glossary

by Elaine

We are going to look at how competitive markets supply curve, revenue, short-run, long-run EVERYTHING!


Competetive market = Perfectly competitive market //3 Characteristics // of a competitive market: 1) Many buyers and many sellers in the market 2) Sellers produce identical products 3) (O) Entry and exit! ... b/c there are so many participants in these markets, sellers are //price takers// , ones who sell at the price given by the market.



Lots of math in this chapter! *Firms want to //maximize // their //profit //<span style="font-family: Arial,Helvetica,sans-serif;">. * //<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // Profit= Total Revenue - Total Cost

First... let's find out how to solve total revenue //<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // Total Revenue = Price x Quantity b/c competitive market firms are //<span style="color: #fa1e1e; font-family: 'Times New Roman',Times,serif; font-size: 110%;">price takers //, the quantity produced does not change the price.//<span style="color: #dc509d; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> AKA the demand curve is a straight horizontal line // So in order for a firm to gain more revenue, it can only produce more quantity //<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">*b/c price is always the same, total revenue is proportional to the amount of output* //

//<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // Average Revenue, how much revenue a firm gets for one unit sold (wait, isn't this basically the price? OF COURSE IT IS), = Total Revenue / Quantity


 * Average Revenue = Price

//<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // Marginal Revenue, the change in total revenue from the sale of each additional unit of output, = change of Total Rev. / change in Quantity (wait isn't this basically the same formula as Average Revenue? YES)


 * Marginal Revenue = Average Revenue = Price

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<span style="color: #93caf0; font-family: 'Comic Sans MS',cursive; font-size: 150%;">Profit Maximization and the Supply Curve (from now on there will be a lot of math)
//<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 140%;">How do firms decide how much supply to produce? // //<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // <span style="font-family: Arial,Helvetica,sans-serif;">Total Cost = Fixed Cost + Variable Cost Profit= Total Revenue - Total Cost Marginal Revenue represents the amount of revenue the firm earns per additional unit sold and marginal cost is the cost the firm has per additional unit sold. //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***Therefore, as long as MR exceeds MC, increasing the quantity produced raises profit** //*

media type="file" key="econ ch.14 3.m4a" width="300" height="50" //<span style="color: #dc509d; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***Profit-maximizing quantity is at which MC intersects MR*** // //<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // B/c the MC determines the quantity of good the firm is willing to supply, the //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">marginal cost curve // could also be the //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">supply curve //
 * If MR is greater than MC firms should increase their output
 * If MC is greater than MR firms should decrease their output

<span style="color: #93caf0; font-family: 'Comic Sans MS',cursive; font-size: 130%;">Whether to Shutdown or not.. in the short-run //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Shutdown //<span style="font-family: Arial,Helvetica,sans-serif;"> is when firms temporarily stop producing during a period of time. //<span style="color: #fd6f26; font-family: 'Times New Roman',Times,serif; font-size: 120%;">*Firms that shut down temporarily still have to pay their fixed costs, called sunk cost* //<span style="font-family: Arial,Helvetica,sans-serif;"> The firm shuts down if the revenue that it would get from producing is //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">less than it's variable costs //<span style="font-family: Arial,Helvetica,sans-serif;"> of production. //<span style="color: #e9e944; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Simply put: //<span style="font-family: Georgia,serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">Shutdown if TR < VC. Shutdown if TR/Q < VC/Q //<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Shutdown if P < AVC //<span style="font-family: Georgia,serif;"> //(Sunk Cost= Fixed Cost, is like "spilt milk" There's no use crying about it. It's gone. )// media type="file" key="econ shutdown.3gp" width="300" height="300" <span style="color: #93caf0; font-family: 'Comic Sans MS',cursive; font-size: 130%;">Whether to Exit or not... in the long-run //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Exit //<span style="font-family: Arial,Helvetica,sans-serif;">is permanently exiting the market. //<span style="color: #fd6f26; font-family: 'Times New Roman',Times,serif; font-size: 120%;">*Firms that exit lose their fixed cost as well. They are basically out of the market* // <span style="font-family: Arial,Helvetica,sans-serif;">The firm exits if the revenue it would get from producing is //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">less than its total cost //<span style="font-family: Arial,Helvetica,sans-serif;">. //<span style="color: #e9e944; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Simply put: //<span style="font-family: Georgia,serif;"> <span style="font-family: Arial,Helvetica,sans-serif;">Exit if TR<TC Exit if TR/Q<TC/Q //<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Exit if P<ATC //<span style="font-family: Georgia,serif;"> media type="file" key="another econ .3gp" <span style="color: #93caf0; font-family: 'Comic Sans MS',cursive; font-size: 130%;">Profit or Loss? media type="file" key="blehhh econ.3gp" //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Profit=(P-ATC) Q // <span style="font-family: Arial,Helvetica,sans-serif;">In the long-run, firms can enter and exit the market freely. When a market is earning profit, it gives other firms an incentive to enter the market //<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Increase in firms=>increase in quantity of good supplied=>drive down prices=>drive down profit // When a market is losing profit, it gives other firms an incentive to exit the market //<span style="color: #800080; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Decrease in firms=>decrease in quantity of good supplied=>drive up prices=>drive up profit //
 * Eventually, the process of entry and exit in the market must be making //<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">zero economic profit //***

The process of entry and exit only ends when price and ATC are equal b/c this is where there will be no more incentive to join or leave. Let's go back the math formula. If P=ATC, then P-ATC=0. If (P-ATC)=0 then (P-ATC)Q would also equal zero. //<span style="color: #365ae7; font-family: 'Times New Roman',Times,serif; font-size: 120%;">This means there's zero profit. //

//***Production with lowest average total cost is the firm's<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> efficient scale. In the long-run equilibrium of a competitive market with free entry and exit must have firms operating at their efficient scale***//

.... <span style="color: #f77df0; font-family: 'Comic Sans MS',cursive; font-size: 110%;">But why stay in business if you make //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">zero // profit? ...

1) Total cost includes all the opportunity costs of the firm 2) In this zero-profit equilibrium, the//<span style="color: #f77df0; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> firm's revenue compensates // the owners for//<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> the opportunity costs //they spend to run the business //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember // that the purpose of business is to gain //<span style="color: #fd6f26; font-family: 'Times New Roman',Times,serif; font-size: 120%;">money dinero 돈 // nothing more. The owner basically gives up the opportunity cost in order to earn money. It's the same as a gardener giving up his time to cut the bushes and earn money. His economic profit could be zero as well, but he'd still do the work because he needs the money and the revenue, aka money, compensates for his time and other opportunity costs.
 * i.e. time and money owners devote to the business

//***Although <span style="color: #fa1e1e; font-family: 'Times New Roman',Times,serif; font-size: 120%;">economic profit is <span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">zero, <span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">accounting profit is <span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">positive ***//

<span style="color: #93caf0; font-family: 'Comic Sans MS',cursive; font-size: 150%;">Conclusion
> competitive market with free entry and exit must have firms operating at their efficient scale***//
 * //<span style="color: #ff9600; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Remember this! // Profit= Total Revenue - Total Cost
 * Marginal Revenue = Average Revenue = Price
 * //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***Therefore, as long as MR exceeds MC, increasing the quantity produced raises profit** //*
 * //<span style="color: #dc509d; font-family: 'Times New Roman',Times,serif; font-size: 120%;">***Profit-maximizing quantity is at which MC intersects MR*** //
 * B/c the MC determines the quantity of good the firm is willing to supply, the //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">marginal cost curve // could also be the //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">supply curve //
 * //<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Shutdown if P < AVC (short-run) //
 * //<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Exit if P<ATC (long-run) //<span style="font-family: Georgia,serif;">
 * //<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Profit=(P-ATC) Q //
 * ***Eventually, the process of entry and exit in the market must be making //<span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">zero economic profit //***
 * //***Production with lowest average total cost is the firm's<span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;"> efficient scale . In the long-run equilibrium of a
 * //***Although <span style="color: #fa1e1e; font-family: 'Times New Roman',Times,serif; font-size: 120%;">economic profit is <span style="color: #ff0000; font-family: 'Times New Roman',Times,serif; font-size: 120%;">zero, <span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">accounting profit is <span style="color: #4bf631; font-family: 'Times New Roman',Times,serif; font-size: 120%;">positive ***//

__<span style="color: #c0c0c0; font-family: 'Comic Sans MS',cursive; font-size: 140%;">Glossary __<span style="color: #000000; font-family: Arial,Helvetica,sans-serif;"> 1. Competitive Market- market with many buyers and sellers trading identical products (price taker) 2. Average Revenue- revenue divided by the quantity output 3. Marginal Revenue- change in total revenue from an additional unit sold 4. Sunk Cost- fixed cost

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