Competitive market: many buyers and sellers trading identical products so that each
buyer and seller is a price taker.
Price takers: buyers and sellers must accept the price the market determines.
Cant influence market price because production is such small part of total
Firms can freely enter and exit the market.
Small firms: can’t change market price, but can increase quantity to increase
Average revenue: total revenue (PxQ) divided by the quantity sold (x).
All firms’average revenue equals the price of the good.
Marginal revenue: the change in total revenue from an addition unit sold
Marginal revenue equals the price of the good (average revenue) (competitive
If marginal revenue is greater than marginal cost you should increase production, and
The marginal cost curve determines the quantity of the good the firm is supplying,
so it is the supply curve.
Shut down: short run decision to not produce anything for a specific time period
Still pays fixed costs (sunk costs)
Shuts down if the revenue that it would earn from producing is less than its
variable costs of production.