Reading notes--Principles of Economics (chapter14)

Summary

This chapter 14 is the Firms in Competitive markets. This chapter introduces the nature and characteristics of competitive markets.

What it is

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

Characteristics

• average revenue = price
• marginal revenue = price

Profit

• Profit = TR - TC
• Profit = (TR/Q - TC/Q）* Q
• Profit = (P - ATC) * Q

Profit maximization

• marginal cost = marginal revenue
• price = marginal revenue
• produce the quantity when P = MC

Exit

• Exit means firms do not produce goods any more in the long run.
• Firms loss its revenue but do not burden the total cost of production.
• Firms exit if the total revenue is smaller than the total cost.

Shut down

• Shut down means firms do not produce goods any more in the short run.
• Firms loss its revenue but do not burden the variable cost of production.
• Firms shut down if the total revenue is smaller than the variable cost.

Supply curve in a competitive market

• In the short run

• In the long run

Price = minimum ATC in the long run

Definitions

1. Competitive market– a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

2. Marginal revenue– the change in total revenue from an additional unit sold

3. Average revenue– total revenue divided by the quantity sold

4. Sunk cost– a cost that has already been committed and cannot be recovered

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. A competitive firm maximizes profit by choosing the quantity at which_____(Correct answer: B)

a. average total cost is at its minimum

b. marginal cost equals the price

c. average total cost equals the price

d. marginal cost equals average total cost

My wrong answer: D