Exam #3 Micro Chapter 14
total revenue
Price x Quantity
Change in Profit
MR-MC
Shut down if (2)
P<AVC (price of a good is less than the average variable cost of production)
competitve market
Sometimes called a perfectly competitive market, has two characteristics: there are many buyers and sellers in the market. The goods offered by the various sellers are largely the same.
Exit if (1)
TR/Q < TC/Q
Exit if
TR/Q is average revenue, which equals the price P, and that TC/Q is average total cost, ATC. Therefore the firms exit rule is P<ATC
Shut down if
TR<VC( total revenue is less than variable cost)
Average Total Cost curve
U-shaped
Marginal cost curve
crosses the average total cost curve at the minimum of the average total cost
Three general rules for profit maximization
if marginal revenue is greater than marginal cost, the first should increase its output. if marginal cost is greater than marginal revenue, the firm should decrease its output. At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal.
exit
refers to a long-run decision to leave the market. (does not have to pay any costs, fixed or variable.)
shut down
refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. (still has to pay its fixed costs)
marginal revenue
the change in total revenue from an additional unit sold
profit maximization
the firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue
average revenue
total revenue divided by the quantity sold
profit
total revenue minus total cost
third condition of perfectly competitive markets
Firms can freely enter or exit the market.
price takers
Buyers and sellers in a competitive market that must accept the price that the market determines.
firm exits if
Total revenue is less than total cost
sunk cost
a cost that has already been committed and cannot be recovered. "dont cry over spilt milk" "let bygones be bygones"
marginal cost curve
a graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced. upward-sloping