M B A 8620 Chapter Notes - Chapter 8: Average Variable Cost, Market Power, Marginal Revenue

• School: Clemson University
• Department: Business Administration
• Course: M B A 8620
• Professor: Ron Gregory

Document Summary

A firm is a price taker if it faces a price curve that is horizontal at the market price. Characteristics: many small buyers and sellers, identical products, all participants have full information about price and product characteristics, transaction costs are negligible, firms can freely enter and exit the market in the long run. Reasons to assume that all firms want to maximize their profits: owners and managers say their objective is to maximize profit, firms that don"t maximize profit are likely to lose money and be driven out of business. 2 step decision making to determine how to maximize profit: how much to produce. A competitive firm can easily determine its marginal revenue because it faces a horizontal demand curve. A competitive firm can sell as many units of output as it wants at the market price, p. Revenue increases by p when it sells one more unit, thus, mr=p. Profit maximization = mr(q) = mc(q) = p.