Chapter+14+Firms+in+competitive+Markets.JAKS

=Chapter 14. = =Firms in Competitive Markets = 
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 Definitions
-competitive market: market with many buyers and sellers trading identical goods -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

Learning Objectives
-How Competitive Firms and Competitive Markets work -Profit Maximization/a Firm's Supply Curve -A Firm's Short run and Long run Decisions -Shift and Slopes in Demand Curves of firms in competitive markets

What are the characteristics of a competitive market? A competitive market has many buyers and sellers who buy and sell similar products. Therefore, actions of single buyers and sellers have a negligible impact on market conditions. Firms are price takers which means they cannot determine the price in which to sell their products. Firms also have free entry and exit in the market.
 * Introduction**

In these competitive markets, • Profit = TR (total revenue) - TC (total cost) • If P>ATC, a firm should enter

The goal of these types of markets is to maximize their profit. That is, their intention is to figure out the quantity at which the product will be the highest.
 * The goal of competitive markets**

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The maximum profit is where the MC line meets the MR line. Therefore, a firm maximizes profit by producing the quantity at which marginal cost meets marginal revenue. • Firms compare the marginal revenue and marginal cost for each unit of production to find the profit-maximizing quantity. • If Marginal Revenue is greater than Marginal Cost, a firm should increase production for profit. • If Marginal Revenue less than Marginal Cost, a firm should decrease production for profit. • If Marginal Revenue is equal to Marginal Cost, a firm is at profit-maximizing level of output

If a firm does not receive any profit, it will shut down. The difference between shutting down and exiting is that even if a firm shuts down temporarily, it still has to pay the fixed costs because fixed cost always equals a certain amount no matter how much a good is being produced. If the cost is continuously greater than revenue, a firm may consider exiting the market. However, this process can only occur in the long run because it's not something that can happen in the short run.
 * A Firm's Decision to Shut Down/Exit**

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Shut down total revenue < variable cost price < average variable cost

Exit total revenue < total cost price < average total cost

Simply, if a firm's profit is less than what it has to pay for producing the goods, it should shut down. It is a better idea for firms to shut down or exit if it's paying more for production than what it is gaining from selling its products.

Sunk costs When deciding whether to shut down, exit, or continue production, sunk costs should not affect a firm's decision because they cannot be recovered because they have been committed already.

The short run supply curve is the part of its marginal cost curve that is above its average variable cost The long run supply curve is the marginal cost curve above the lowest point of its average total cost curve
 * Supply Curve in a Competitive Market**

In the Short Run the market contains a Fixed Number of Firms because firms can neither enter nor exit in the short run -For any price, each firm's quantity is equal to where marginal cost equals price -The market supply curve is the firms’ marginal cost curves

In the Long Run the market contains firms with Entry and Exit -Firms will enter or exit the market until total economic profit is zero -Price is the minimum of average total cost (horizontal market supply curve) -after firms enter and unsuccessful firms exit, the remaining firms are making zero economic profit -entry and exit stops when profit is at equilibrium -equilibrium operates at efficient scale

Shift in Demand -short run: increase in demand raises price and quantity -firms earn profit when prices exceed average total cost

-some resources that are used in production may be available only in limited quantities -each firm has different costs of production -the long run supply curve is more elastic because firms can enter and exit freely
 * Why the long run supply curve slopes upward**

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 * THANK YOU **

  

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