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Lecture 11

ECON 102 Lecture 11: econ102 - ch 14

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ECON 102

Firms in Competitive Markets – Chapter 14 Characteristics of Perfect Competition 1. many buyers and many sellers 2. the goods offered for sale are largely the same 3. firms can freely enter and exit the market • because of characteristics 1 and 2, each buyer and each seller is a “price taker” or they take the price as given The Revenue of a Competitive Firm • total revenue = TR = P*Q • average revenue = AR = TR/Q = PQ/Q = P • marginal revenue = MR = TR/Q o the change in total revenue from selling one additional unit For a Perfectly Competitive Firm • MR = P = AR o NOT the case for a monopoly • in economics, we assume that a firm’s goal is to maximize profit • TT = TR = TC • profit is maximized where MR = MC o marginal revenue = marginal cost Shut Down vs Exit • shut down – short run decision not to produce anything but the firm is still in the market due to fixed costs o TT = Q (P – ATC) o firm will shut down if P < AVC o the supply curve for an individual firm is the MC curve above the minimum of the AVC • exit – long run decision to leave the market o exit if TT < 0 or if TR < TC or if P < ATC o enter if TT > 0 or if TR > TC or if P > ATC Market Supply Assumptions • all existing firms and potential entrants to have identical costs • each firm’s costs do not change as other firms enter and exit • the number of firms is fixed in the short run but variable in the long run Textbook Notes What is a Competitive Market? • competitive market – aka. perfectly competitive market o there are many buyers and many sellers in the market o the goods offered by the various sellers are largely the same o buyers and sellers are price takers o firms can freely enter or exit the market • average revenue – how much revenue a firm receives for the typical unit sold; the price of the good 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 o 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 • marginal revenue – change in total revenue from the sale of each additional unit of output; in competitive markets, = the price of the good Profit Maximization and the Compe
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