Chapter+14+-+Firms+in+Competitive+Markets+CDJ

= This is a handout of powerpoint from Mankiw website: = = = =What is a Competitive Market? = media type="youtube" key="seKH552xd5c" height="344" width="425" source: http://kr.youtube.com/watch?v=seKH552xd5c 1. there are many buyers and many sellers in the market 2. the goods offered by the various sellers are largely the same. 3. Firms can freely enter or exit the market. Each buyer and seller takes the market price as given. They are known as **price takers **.
 * Competitive Market **, also known as perfectly competitive market, has three characteristics:

source: http://www.blacktablemedia.com/

In terms of Dairy Farm, there are two questions to ask when dealing with the concepts of **average ** and ** marginal revenue ** : 1. How much revenue does the farm receive for the typical gallon of milk? 2. How much additional revenue does the farm receive if it increases production of milk by 1 gallon?

source: [|http://www.oswego.edu/~atri/ann302.htm] ** Average total revenue = total revenue / quantity sold For all firms, average revenue equals the price of the good. Marginal revenue = change in total revenue + unit of output. For competitive firms, marginal revenue equals the price of the good.**

media type="youtube" key="7RnIXc1ub1k" height="344" width="425" source: http://kr.youtube.com/watch?v=7RnIXc1ub1k

=Profit Maximization and the Competitive Firm's Supply Curve = The main goal of a competitive firm is to **maximize profit ** (total revenue - total cost). We can find the profit-maximizing quantity by comparing the **marginal revenue ** and **marginal cost**. If MR > MC, the firm increased the production of goods. If MR < MC, the firm decreased the production.

We can also look at the Profit maximization curve to see when there is profit. 1. **MC** is upward sloping 2. **ATC** is U-shaped 3. **MC** crosses ** ATC ** at the minimum of the ATC 4. **Prize ** is a horizontal line 5. Firm's prize = AR = MR

source: http://welkerswikinomics.com/blog/category/competition/ The market temporarily shuts down or exits market in certain market circumstances. In short run, the firms would shut down if total revenue < variable cost, TR / Q < VC / Q, or prize < AVC. When the firm shuts down, it might seems like they are worse off because they are not making any money, but shutting down is actually beneficial if staying open in the market would lose the firm even more money.

Just like the quote **"don't cry over spilt milk," ** in economy, there's a **sunk cost **, which is a cost that has already been committed and cannot be recovered. We can think of the sunk cost as the opposite of opportunity cost. source: http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=105x6887531 In long run, the firm would exit the market if TR < T, TR / Q < TC / Q, or prize < ATC. The firm would also enter the market if prize > ATC. Pretty much, the criterion for entry is exactly the opposite of the criterion for exit.

When we take a look at the competitive firm's long run graph, we can see that the supply curve is the portion of its MC curve that lies above ATC. Profit = TR - TC = (TR / Q - TC / Q) x Q = (prize - ATC) x Q

=The Supply Curve in a Competitive Market = In short run, the number of firms in the market is fixed, so the marginal supply = marginal cost. On the other hand, in long fun, the market will have an incentive to enter or exit the market according to how much profit they earn. Because the firms enter and exit markets, firms that remain in the market will eventually be making zero profit. source: http://www.jurgilas.net/fpdb/Econ%20111%20sum04/chapter14.htm

=Summary =
 * Competitive firm is a price taker.
 * The price equals both firm's average revenue and its marginal revenue.
 * When marginal revenue equals marginal cost, there is profit.
 * In the short run, the firm will shut down if the price of the good is less than average variable cost.
 * in the long run, the firm will exit if the price is less than average total cost.
 * In the long run, the competitive firm will earn zero profit.

=<span style="color: rgb(226, 12, 233);">Practice Questions = 1. What is a competitive market? 2. Why does profit = 0 in long run competitive firm?

Answers: 1. Competitive market is a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. 2. Profit equals zero in long run competitive firm because if the price is above ATC, the profit is positive, so new firms would enter, but if the proce falls under ATC, then some firms would exit. After the process of entry and exit, the price and ATC would end up at an equilibrium.