ECN 104 Chapter 14: Chapter 14 - Firms in Competitive Markets
11 Feb 2012
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The goods offered for sale are largely the same. Firms can freely enter or exit the market. The change in tr from selling one more unit. a competitive firm can keep increasing its output without affecting the market price. so, each one-unit increase in q causes revenue to rise by p, i. e. , mr = p. to find the answer, think at the margin. If increase q by one unit, revenue rises by mr, cost rises by mc. If mr > mc, then increase q to raise profit. If mr < mc, then reduce q to raise profit. A short-run decision not to produce anything because of market conditions. If shut down in sr, must still pay fc. cost of shutting down: revenue loss = tr. benefit of shutting down: cost savings = vc (firm must still pay fc) so, shut down if tr < vc.
