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Lecture 14

AUECO101 Lecture Notes - Lecture 14: Market Power, Marginal Revenue, Marginal Cost

7 pages19 viewsWinter 2016

Augustana Faculty - Economics
Course Code
Kristin Cumming

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Chapter 14
Firms in Competitive Markets
A market is competitive if each buyer and seller is small compared to the size of
the market and, therefore, has little ability to influence market prices
Competitive Market: A market in which there are many buyers and many sellers
so that each has a negligible impact on the market price (price takers)
Three Characteristics:
o1. There are many buyers and many sellers in the market
o2. The goods offered by the various sellers are largely the same
o3. Firms can freely enter or exit the market
The Revenue of a Competitive Firm
A firm in a competitive market tries to maximize profit, which equals total
revenue minus total cost (TR=PxQ (Price multiply quantity)
Average revenue tells us how much revenue a firm receives for the typical unit
Average Revenue (AR): Total revenue divided by the quantity sold
Marginal Revenue (MR): The change in total revenue from an additional unit
For competitive firms, marginal revenue equals the price of the good
Profit Maximization and the Competitive Firm’s Supply Curve
Marginal cost curve represents the supply curve
Price curve –is a horizontal line
Where P=AR=MR=MC =efficient line
If marginal cost is larger than price –we should create less quantity
If marginal cost is smaller than price –increase production –PROFIT
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The Marginal-Cost Curve and the Firm’s Supply Decision
The marginal-cost curve (MC) is upward sloping
The average-total-cost curve (ATC) is U-shaped
The marginal-cost curve crosses the average-total-cost curve at the minimum of
average total cost
Horizontal line at the market price (p) –because the firm is a price taker
For a competitive firm, the firm’s price equals both its average revenue (AR) and
its marginal revenue (MR)
Three rulers that are key to rational decisions making for profit maximization:
o1.If marginal revenue is greater than marginal cost, the firm should
increase its output
o2. If marginal cost is greater than marginal revenue, the firm should
decrease its output
Where MC and ATC meet is our MOST efficient point –we can move towards move
profit thought.
o3. At the profit-maximizing level of output, marginal revenue and
marginal cost are exactly equal
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