Chapter+14+Firms+in+competitive+Markets+(Joon,+Scott,+and+Steven)


 * Firms in Competitive Markets**



**Key Terms**


 * competitive market**: a market with many consumers and producers trading the same products 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 and additional unit of product sold
 * sunk cost:** a cost that has already been decided and cannot be recovered



Because there are countless numbers of buyers and sellers in the market, no single buyer/seller can directly affect the market. Thus, the buyers and sellers are price takers of the market, in which they must accept the price of the product as it is.

Average revenue and marginal revenue also comes in handy when dealing with competitive markets


 * Average revenue simply determines how much the firm usually earn from producing one unit of good
 * Marginal revenue simply determines how much the firm gain from producing one more additional unit

**Profit Maximization and the Competitive Firm's Supply Curve**

In order to maximize profit in competitive markets, the firms' **MR = MC**

Therefore, if the MR is greater than MC, firms increase production of profit But if the MR is less than MC, firms decrease production of profit




 * MC is an upward slope
 * ATC is U-shaped
 * P is horizontal (price)
 * MC crosses at ATC's lowest point

**The Firm's Short-Run Decision to Shut Down**

The firm will decide to shut down only in short-run, which allows the firm to temporally not produce any profit.

The main reason is because TR < VC. This can also be written as:

TR/Q < VC/Q which then leads to
 * P < AVC**

The firm won't be able to produce any profit, but it will also be able to save its variable cost.

But firms can't save their every single cents. Their sunk costs, which is the cost that has already been commited and cannot be recovered, will still come in effect no matter what they do.

**The Firm's Long-Run Decision to Exit**

Similarly to shut-down, firms can stop producing their profit in the long-run. But this time, its leaving the market for good!

This time, the firm may leave if TR < TC. This can also be written as:

TR/Q < TC/Q which then lead to
 * P < ATC**

**Measuring Profit for Competitive Markets**

In order to measure the profit, we follow the following calculation

Profit = TR - TC which can also be written as Profit = (TR/Q - TR/Q) * Q which then leads to
 * Profit = (P - ATC) * Q**



**The Supply Curve in a Competitive Market**

__Short Run__

Simple, because the firms are fixed in short-run, the MC curve is the supply curve as long as the price stays above ATC

__Long Run__

Little bit more difficult but still simple. Because different firms decide to exit or enter the market due to loss or gain in their profit, the overall profit for the firms that remain in the market will eventually become 0 (new equilibrium).

In this chapter, we have discussed about the general idea of what a competitive market is, and their short-run and long-run effects. But this is not all! There are three more other types of markets yet to be discussed...

media type="youtube" key="61GCogalzVc" height="344"


 * Review Questions**


 * 1) What are the 3 characteristics of a competitive market?
 * 2) Can shut down prevent sunk cost? Why or why not?
 * 3) Why do long-run firms earn 0 profit?

Answers
 * 1) many buyers/seller, homogenous products, can exit or enter
 * No, because sunk cost is a cost that can not be put back or prevented
 * 1) When price is above ATC, new firms enter because they gain profit. When price is below ATC, old firms exit because they lose profit. As this process continues over and over, the equilibrium eventually becomes 0.

Sources

http://www.ehomeandloan.com/tips.html?*session*id*key*=*session*id*val* http://www.businessbookmall.com/Economics_23_Pure_Competition.htm http://welkerswikinomics.com/blog/category/competition/