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CAS EC 101 (177)
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Chapter 14

Chapter 14 Firms in Competitive Markets.pdf

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CAS EC 101
Todd Idson

Chapter 14: Firms in Competitive Markets Saturday, December 14, 2013 12:45 AM I. What Is a Competitive Market? A. The Meaningof Competition ○ Competitive market (perfectly competitive market): Many buyers and sellers, offers the same goods and firms can enter and exit freely  Actions of single buyer or seller has a negligible impact on the market place because of large markets  PRICE TAKERS B. The Revenue of a Competitive Firm ○ The price does not depend on the number of goods the firms produce ○ Total revenue is proportional to the amount of output ○ For all firms, average revenue equals the price of the good ○ Marginal revenue is fixed because it equals the price of the good II. Profit Maximization and the Competitive Firm's (Pat's Dick is Firm) Supply Curve A. A Simple Example of Profit Maximization ○ Marginal revenue must be higher than marginal cost to raise profit B. The Marginal-Cost Curve and the Firm's Supply Decision ○ The marginal-cost curve (MC) is upward sloping ○ The average-total-cost(ATC) is U-shaped ○ MC and ATC crosses at the min ○ Rules of profit maximization  If MR is greater than marginal cost, the firm should increase its output  If MC is greater than MR, the firm should decrease its output  At the profit-maximizinglevel of output,MR and MC are exactly equal  MR equals the price  Intersection of MR and MC is the profit maximizing quantity  MC is the firm's willingness to produce so MC = Supply curve C. The Firm's Short-Run Decision to Shut Down ○ Shutdown: Firm's decision to not produce in the short run temporarilybecause of current market situations  If the revenue that it would earn from producing is less than its variable costs of production □ Shut down if P < AVC  Firms can reopen if market condition changes in the future  The firm still loses money because it has to pay fixed costs but it loses more if it stays open ○ Exit: Long run decision to leave the market  Most firms cannot avoid fixed costs in the long run  Competitive firm's short run supply curve is the portion of its marginal cost curve that lies above average variable cost D. Spilt Milk and Other Sunk Costs ○ Sunk costs: Costs that has already been committed and cannot be recovered  Fixed costs are sunk in the short run, the firm can ignore them when deciding how much to produce how much to produce  Restaurants only shut down during lunch hours when the variable costs (wages
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