Chapter 14 Firms in Competition Markets

*Firms supply curve = marginal supply curve above the Minimum AVC*

Market is competitive is each buyer and seller is small compared to the size of the market and have little ability to influence market price

What is a Competitive Market? Market where are many buyers and many sellers and have very minimal impact on the market Price (Price Takers) Have 3 Characteristics Many Buyers and many Sellers Goods offered by various sellers are mainly the same Firms can freely enter and exit the market

The Revenue of a Competitive Firm Firm trying to maximize profits which equals to total revenue Total cost Maximize Profit = Total Revenue (TR) Total Cost (TC) Revenue of Competitive Firm Total Revenue (TR) = Price (P) x Quantity (Q) Average Revenue tells how much revenue a firm receives for the typical unit sold. Total Revenue divided by Quantity Sold Average Revenue (AR) = P x Q/Q = P Marginal Revenue is the change in total revenue from additional unit sold MR = Change in total Revenue / Change in Quantity For Competitive firms Marginal Revenue = Price of Good

Profit Maximization and the Competitive Firms Supply Curve How Firms Maximize the Profit and how decision leads to the supply curve Rational people think at Margin If MR > MC, the production of good increased If MR < MC, the production of good decreased If MR = MC, the maximizing of profit

The Marginal-Cost Curve and the Firms Supply DecisionEffect on Cost Curves (MC) Marginal Cost Curve is Upward (ATC) Average Total Cost is U Shaped MC curve Crosses the ATC at minimum of Average Total Cost Horizontal Line is Market Price (MP) and its horizontal ecause the firm is price taker

For Competitive Firm, Price = AR = MR 3 rules which are key to make rational decision for making profi If MR is > than MC = Increase Output If MC > MR = Decrease the Output When making maximize profit MC = MR

The Firms Short-Run Decision to Shut Down Shut Down VS Exit Shut down, a short term decision, not to produce anything during a period of time because market conditions Exit, Long term decision, leave the market The Long term VS Short term because fixed cost are hard to managed during Short term than Long Term.

The Firms Short Run Decision to shut down Firm Loses all revenue from the sale of their product It saves all the Variable cost but still must pay the fixed cost at the same time The firm shut down because revenue is less than variable cost Shut Down because TR < VC Shut Down because (TR/Q) < (VC/Q) Shut Down because P < AVC Sunk Cost: The cost which is already pent and cannot be recovered Ignored when making decisions about various aspects of life and Business

The Firms Long-Run Decisions to Exit or Enter the Market When exiting, the firm lose all revenue from product sale But also save on both Fixed and VC of production When revenue is less than the total producing costs Exit when TR < VC When (TR/Q) < (TC/Q) When P < ATC The exit price aligns with the minimum point on ATC Curve Shutdown Price Align with minimum Point on AVC Curve The Firm Enters the market if its profitable When price is greater than ATC

Measuring Profit in Our Graph for the Competitive Firm Allows us to measure the profit in graphs Profit = TR-TC Profit=(TR/Q TC/Q) x Q Profit = (P ATC) x Q

The Supply Curve in competitive Market 2 case to consider1. Market with Fixed Number of firms2. Market changing when old firm are gone and new enterThe Short Run: Market Supply with Fixed Number of Firms For any given price, each firm supplies a quantity of output So its marginal cost = price

The Long Run: Market Supply with Entry and Exit When market is profitable for older firms Its a bonus for new firms to enter The new firm increase the # of Firms, increasing the quantity of goods supplied and drive down prices and profits Vice versa At the end of this process of entry and exit, firms that are still in market must make zero economic profit Long Run Equilibrium of competitive market with free entry and exit must have firm making their efficient scale

Why Do Competitive Firms Stay in Business If They Make Zero Profit? In the zero Profit Equilibrium, Economic profit is zero, but accounting profit is positive

A Shift in Demand in the Short Run and Long Run Firms can enter and exit the market in long run at free well but not in the short run

The response of the market to change in demand depends on the time horizon FIGURE 14.8: An Increase in Demand in the Short Run and Long Run

Why the Long-Run Supply Curve Might Slope Upward Two reasons:1. Some resources used in the production may only be available in limited quantities2. Firms may have different cost3. An Upward Sloping Long-Run Supply Curve :

Short Term Objects of firm to maximize the products Find Marginal Revenue (MR) MR = Profit = Average Margin Find the quantity where Marginal Revenue (MR) = Marginal Cost (MS)