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Chapter 14

Chapter 14 - Firms in Competitive Markets

2 Pages
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Department
Economics
Course Code
Economics 10a
Professor
Gregory Mankiw

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Chapter 14: Firms in Competitive Markets  ­ market power if firm can influence market price of good What is a Competitive Market? ­ many buyers and sellers ­ identical goods ­ actions of single buyer or seller has negligible impact, price takers ­ firms can freely enter or exit market ­ average revenue: total revenue/amount of output  ▯equal to price for all firms ­ marginal revenue: change in total revenue from the sale of each additional unit  ▯ equal to price for competitive firms  Profit Maximization and the Competitive Firm’s Supply Curve ­ if marginal revenue > marginal cost, firm should increase output ­ if marginal cost > marginal revenue, firm should decrease output ­ at profit­maximizing level of output, marginal revenue = marginal cost ­ because competitive firm is price taker, marginal revenue = market price ­ for competitive firms, profit­maximizing quantity found by looking at intersection  of price with marginal­cost curve ­ shutdown: short­run decision not to produce anything during specific period of  time ­ exit: long­run decision to leave market ­ sunk cost: cost that has already been committed and cannot be recovered  ­ in short run, firm shuts down if TR 
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