What is a Competitive Market?

Firm's decision

Shut down if TR < VC (or P <AVC) -TR = total revenue -VC = variable costs

Average revenue, AR = TR / Q

total revenue divided by the quantity sold

Profit

total revenue minus total cost

Firms in a competitive market

tries to maximize profit

Marginal-cost curve

- Determines the quantity of the good the firm is willing to supply at any price - MC curve above shut-down point is the supply curve

Measuring profit

- If P > ATC, • Profit = TR - TC = (P - ATC) ˣ Q - If P < ATC, • Loss = TC - TR = (ATC - P) ˣ Q = Negative profit

Exit

-Long-run decision to leave the market -Firm doesn't have to pay any costs

Sunk cost

-a cost that has already been committed and cannot be recovered -should be ignored when making decisions

Competitive market

-a market with many buyers and sellers -trading identical products -each buyer and seller is a price taker -firms can freely enter or exit the market

Marginal revenue, MR = ^TR / ^Q

Change in total revenue from an additional unit sold

Firm's long-run decision

Exit the market if: TR < TC (same as: P < ATC) Enter the market if: TR > TC (same as: P > ATC)

Shutdown

-a short-run decision not to produce anything -during a specific period of time -because of current market conditions -firm still has to pay fixed costs

Total revenue, TR = P x Q

-prices times quantity -proportional to the amount of output

Maximize profit

-produce quantity where total revenue minus total cost is greatest - MR > MC : increase production -MR < MC : decrease production -maximize profit where MR = MC

Competitive firm's short-run supply curve

-the portion of its marginal cost curve -that lies above average variable cost

Competitive firm's long-run supply curve

the portion of its marginal-cost curve that lies above average total cost