ET3P4: Firms in a competitive market
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.
