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
Competitive market– a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
Marginal revenue– the change in total revenue from an additional unit sold
Average revenue– total revenue divided by the quantity sold
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.
- 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
