ET3P4: Firms in a competitive market

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The long run market supply curve in a competitive market will

typically be more elastic than the short run supply curve

Marginal revenue (MR)=

DTR/DQ

What is a competitive firm?

Keep increases output with out changing price

process of entry or exit is complete- remaining firms earn zero profit is

Long run equillibrium

The __ curve is the firms supply curve

MC

Characteristics of a perfect competition. (3)

Many buyers and many sellers, the goods offered for sell are largely the same, and firms can freely enter or exit the market.

Total revenue =

P x Q

Cost of shutting down in short run

Revenue loss = TR

Average Revenue (AR)=

TR/Q = P

cost saving in long run exit

Total cost

Revenue loss in long run exiting

Total revenue

so exit in the long run if

Total revenue is less than total cost. or P<ATC

So shut down if

Total revenue is less than variable cost. or P < AVC

One of the defining characteristics of a perfectly competitive market is

a similar product

Because there are many sellers in a competitive market, individual firms are

able to maximize profits

Long run market supply curves are horizontal unless

all firms don't have identical cost, or cost change when entering and exiting.

In a competitive market with free entry and exit, if all firms in the market adjust until the market demand is satisfied at a price equal to the minimum of

average total cost of the marginal firm

In the short run, if the market price is below the ______________, the firm will always shut down.

average variable cost curve

In the long run, when price is greater than average total cost, some firms will

choose to enter the market

MR=P is only true in

competitive firms

benefit of shutting down in short run

cost saving= VC

Suppose that some firms in a competitive industry are earning zero economic profits, while others are experiencing losses. All else equal, in the long run, we would expect the number of firms in the industry to

decrease

If MR<MC

decrease Q to raise profit

The long-run supply curve in a competitive market is more

elastic than the short run supply curve.

The stable, long run equilibrium in a competitive market occurs when the market price i

equals the lowest point on the firms average total cost curve

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will

exactly triple

in the long run markets

exit

example of sunk cost

fixed cost

Difference between shutting down and exiting?

if you shut down still have to pay Fixed cost, if you exit no cost are paid

If MR>MC

increase Q to raise profit

zero profit in market when

price = average total cost

In a long run equilibrium, the marginal firm has

price equal to average total cost, total revenue equal to total cost, and economic profit equal to zero.

Firms have no impact on

price in a competitive market

For a firm operating in a perfectly competitive industry, _____ _____ and _____ are all equal

price, marginal revenue, and average revenue

When new firms enter the short run market supply curve shifts

right , and Price falls

If increase Q by one unit, revenue

rises by MR & Cost rises by MC

In the short run markets

shut down

A firm operating in a perfectly competitive industry will _____ in the _____ but earn losses if the market price is is less than the

shut down in the short run; average variable cost

A cost that has already been committed and cannot be removed and is irrelevant in decisions

sunk cost

Whichh cost can be ignored when an individual or firm is making decision?

sunk cost

The assumption of a fixed number of firms is appropriate for the analysis of

the short run but not the long run

The competitive firms long run supply curve is that portion of the marginal cost curve that lies above

total cost

Enter in long run if

total revenue is greater than total cost or if P>ATC

A firm operating in a perfectly competitive industry will continue to operate if it earns

zero economic profits because it is likely to be earning positive profits.


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