Chapter 14 Firms in competitive markets

What are the main characteristics of a competitive market ?

A competitive firm is a firm in a market in which: (1) there are many buyers and many sellers in the market; (2) the goods offered by the various sellers are largely the same; and (3) usually firms can freely enter or exit the market.

Under what conditions will a firm exit a market ?

A firm will exit a market if the revenue it would get from remaining in business is less than its total cost. This occurs if price is less than average total cost.

Average revenue

total revenue divided by the quantity sold

Under what conditions will a firm shut down temporarily ? Explain

A firm will shut down temporarily if the revenue it would get from producing is lower than the variable costs of production. This occurs if price is less than average variable cost

Does a competitive firm's price equal its marginal cost in the short run, in the long run, or both ?

A firm's price equals marginal cost in both the short run and the long run. In both the short run and the long run, price equals marginal revenue. The firm should increase output as long as marginal revenue exceeds marginal cost, and reduce output if marginal revenue is less than marginal cost. Profits are always maximized when marginal revenue equals marginal cost.

When does a profit-maximizing competitive firm decided to shut down?

A profit-maximizing competitive firm decides to shut down in the short run when price is less than average variable cost. In the long run, a firm will exit a market when price is less than average total cost.

Market power

Firm can influence the market price of the good it's sells

Explain the difference between a firm's revenue and it's profit. Which do firms maximize?

For a given price (such as P *), the level of output that maximizes profit is the output where marginal cost equals price (Q*), as long as price exceeds average variable cost at that point (in the short run), or exceeds average total cost (in the long run).

When are profit maximize ?

MR=MC

What are the three characteristics of competition firm?

Many sellers & buyers, goods are identical,free entry and exit.

Are market supply curves typically more elastic in the short run or in the long run ?

Market supply curves are typically more elastic in the long run than in the short run. In a competitive market, because entry or exit occurs until price equals average total cost, quantity supplied is more responsive to changes in price in the long run.

Competitive market

Market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.

What is the goal of the firm?

Maximize profit, which equals TR-TC

In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price P, marginal cost MC, and average total cost ATC?

P=MC and P>ATC

Does a competitive firm's price equal the minimum of its average total cost in the short run, in the long run, or both ?

The firm's price must equal the minimum of average total cost only in the long run. In the short run, price may be greater than average total cost (in which case the firm is making profits), price may be less than average total cost (in which case the firm is making losses), or price may be equal to average total cost (in which case the firm is breaking even). In the long run, if firms are making profits, other firms will enter the industry, which will lower the price of the good. In the long run, if firms are making losses, they will exit the industry, which will raise the price of the good. Entry or exit continues until firms are making neither profits nor losses. At that point, price equals average total cost

How does a competitive firm determine its profit-maximizing level of output?

The price faced by a profit-maximizing competitive firm is equal to its marginal cost because if price were above marginal cost, the firm could increase profits by increasing output, while if price were below marginal cost, the firm could increase profits by decreasing output.

If the firm increases Q

Toal revenue will go up

When a competitive firm doubles the amount it sells, what happens to the price of output and its total revenue?

When a competitive firm doubles the amount it sells, the price remains the same, so its total revenue doubles.

Sunk cost

cost that has already been committed and cannot be recovered.

Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day,the city starts imposing a $100 per month a tax on each stand. How does this policy affect the number of pretzels consumed in the short run and in the long run?

down in the short run, no change in the long run.

If a profit maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

keep producing in the short run, but exit the market in the long run.

A competitive firm maximizes profits by choosing the quantity at which

marginal cost equals the price.

A competitive firm's short-run supply curve is its ____ cost curve above its ___ cost curve.

marginal,average variable

A perfectly competitive firm

takes its price as given by market conditions.

Marginal revenue

the change in total revenue from an additional unit sold.