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FIRMS IN COMPETITIVE MARKETS

FIRMS IN COMPETITIVE MARKETS. Characteristics of Perfect Competition. There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market. The individual firm produces a small portion of total market output.

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FIRMS IN COMPETITIVE MARKETS

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  1. FIRMS IN COMPETITIVE MARKETS

  2. Characteristics of Perfect Competition • There are many buyers and sellers in the market. • The goods offered by the various sellers are largely the same. • Firms can freely enter or exit the market. • The individual firm produces a small portion of total market output. • The firm cannot have any influence over the price it charges. • The individual firm in a perfectly competitive market is a price taker. • It takes the price determined by the market as the price that it will receive for its output.

  3. Revenue of a Competitive Firm • Total revenue for a firm is the selling price times the quantity sold. TR = (P X Q)

  4. Revenue of a Competitive Firm • Total revenue is proportional to the amount of output.

  5. Revenue of a Competitive Firm • Average revenue tells us how much revenue a firm receives for the typical unit sold.

  6. Revenue of a Competitive Firm • In perfect competition,average revenue equals the price of the good.

  7. Revenue of a Competitive Firm • In perfect competition,average revenue equals the price of the good.

  8. Revenue of a Competitive Firm • Marginal revenue is the change in total revenue from an additional unit sold. MR =DTR/DQ

  9. Revenue of a Competitive Firm • For competitive firms, marginal revenue equals the price of the good.

  10. Profit Maximization for the Competitive Firm • The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.

  11. Profit Maximization for the Competitive Firm • Profit maximization occurs at the quantity where marginal revenue equals marginal cost. If MR > MC, increase Qto increase profit. If MR < MC, decrease Q to increase profit. If MR = MC, profit is maximized.

  12. Costs and Revenue Profit Maximization for the Competitive Firm 0 Quantity

  13. Costs and Revenue Profit Maximization for the Competitive Firm ATC AVC 0 Quantity

  14. Costs and Revenue Profit Maximization for the Competitive Firm MC ATC AVC 0 Quantity

  15. Costs and Revenue Profit Maximization for the Competitive Firm MC ATC P P = AR = MR AVC 0 Quantity

  16. Costs and Revenue Profit Maximization for the Competitive Firm The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. MC ATC P P = AR = MR AVC 0 QMAX Quantity

  17. Profit Maximization for the Competitive Firm • A competitive firm will adjust its production level until quantity reaches QMAX where profit is maximized.

  18. Costs and Revenue Profit Maximization for the Competitive Firm MC ATC P P = AR = MR AVC 0 QMAX Quantity

  19. Costs and Revenue Profit Maximization for the Competitive Firm MC ATC P = MR1 P = AR = MR AVC MC1 0 Q1 QMAX Quantity

  20. Costs and Revenue Profit Maximization for the Competitive Firm MC ATC P = MR1 P = AR = MR AVC MC1 MR > MC, increase Q 0 Q1 QMAX Quantity

  21. Costs and Revenue Profit Maximization for the Competitive Firm MC MC2 ATC P = MR2 P = AR = MR AVC 0 QMAX Q2 Quantity

  22. Costs and Revenue Profit Maximization for the Competitive Firm MC MC2 ATC P = MR2 P = AR = MR AVC MR < MC, decrease Q 0 QMAX Q2 Quantity

  23. The Firm’s Decision to Shut Down • A shutdown refers to a short-run decision not to produce anything during a specific period of time. • Exit refers to a long-run decision to leave the market.

  24. The Firm’s Decision to Shut Down • The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down. Sunk costsare costs that have already been committed and cannot be recovered.

  25. The Firm’s Decision to Shut Down • The firm shuts down if the revenue it gets from producing is less than the variable cost of production. Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC

  26. The Firm’s Decision to Shut Down Costs 0 Quantity

  27. The Firm’s Decision to Shut Down Costs MC ATC AVC 0 Quantity

  28. The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC AVC 0 Quantity

  29. The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC If P > AVC, keep producing in the short run. AVC 0 Quantity

  30. The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC If P > AVC, keep producing in the short run. AVC If P < AVC, shut down. 0 Quantity

  31. The Firm’s Decision to Shut Down • The portion of the marginal-cost curve that lies above average variable cost is the competitive firm’s short-run supply curve.

  32. The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC If P > AVC, keep producing in the short run. AVC If P < AVC, shut down. 0 Quantity

  33. Firm’s short-run supply curve The Firm’s Decision to Shut Down Costs MC ATC AVC 0 Quantity

  34. The Long-Run Decision to Exit an Industry • In the long-run, the firm exits if the revenue it would get from producing is less than its total cost. Exit if TR < TC Exit if TR/Q < TC/Q Exit if P < ATC

  35. The Long-Run Decision to Enter an Industry • A firm will enter the industry if such an action would be profitable. Enter if TR > TC Enter if TR/Q > TC/Q Enter if P > ATC

  36. The Competitive Firm’s Long-Run Supply Curve

  37. The Competitive Firm’s Long-Run Supply Curve Costs 0 Quantity

  38. The Competitive Firm’s Long-Run Supply Curve Costs MC ATC AVC 0 Quantity

  39. The Competitive Firm’s Long-Run Supply Curve Costs MC Firm enters if P > ATC ATC AVC 0 Quantity

  40. Costs MC Firm enters if P > ATC ATC AVC Firm exits if P < ATC 0 Quantity The Competitive Firm’s Long-Run Supply Curve

  41. The Competitive Firm’s Long-Run Supply Curve • The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.

  42. Costs MC Firm enters if P > ATC ATC AVC Firm exits if P < ATC 0 Quantity The Competitive Firm’s Long-Run Supply Curve

  43. Firm’s long-run supply curve The Competitive Firm’s Long-Run Supply Curve Costs MC ATC AVC 0 Quantity

  44. The Firm’s Short-Run and Long-Run Supply Curves • Short-Run Supply Curve The portion of its marginal cost curve that lies above average variable cost. • Long-Run Supply Curve The marginal cost curve above the minimum point of its average total cost curve.

  45. Profit as the Area Between Price and Average Total Cost

  46. Profit as the Area Between Price and Average Total Cost Price 0 Quantity

  47. Profit as the Area Between Price and Average Total Cost Price MC ATC 0 Quantity

  48. Profit as the Area Between Price and Average Total Cost Price MC ATC P P = AR = MR 0 Quantity

  49. Profit as the Area Between Price and Average Total Cost Price MC ATC P P = AR = MR ATC Profit-maximizing quantity 0 Q Quantity

  50. Profit as the Area Between Price and Average Total Cost Price MC ATC Profit P P = AR = MR ATC Profit-maximizing quantity 0 Q Quantity

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