econchap14

econchap14 - WHAT IS A COMPETITIVE MARKET? Firms in...

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1 Firms in Competitive Markets Chapter 14 WHAT IS A COMPETITIVE MARKET? s A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. b Buyers and sellers must accept the price determined by the market. The Meaning of Competition s A perfectly competitive market has the following characteristics: b There are many buyers and sellers in the market. b The goods offered by the various sellers are largely the same. b Firms can freely enter or exit the market. The Meaning of Competition s As a result of its characteristics, the perfectly competitive market has the following outcomes: b The actions of any single buyer or seller in the market have a negligible impact on the market price. b Each buyer and seller takes the market price as given. The Revenue of a Competitive Firm s Total revenue for a firm is the selling price times the quantity sold. s TR = ( P × Q ) s Total revenue is proportional to the amount of output. The Revenue of a Competitive Firm s Average revenue tells us how much revenue a firm receives for the typical unit sold. s Average revenue is total revenue divided by the quantity sold.
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2 The Revenue of a Competitive Firm s In perfect competition, average revenue equals the price of the good. Average Revenue = Total revenue Quantity Price Quantity Quantity Price = × = The Revenue of a Competitive Firm s Marginal revenue is the change in total revenue from an additional unit sold. s MR = Δ TR / Δ Q s For competitive firms, marginal revenue equals the price of the good. Table 1 Total, Average, and Marginal Revenue for a Competitive Firm PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM’S SUPPLY CURVE s The goal of a competitive firm is to maximize profit. s This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost . Table 2
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This note was uploaded on 02/16/2009 for the course ECON 2106 taught by Professor Trandel during the Winter '07 term at UGA.

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econchap14 - WHAT IS A COMPETITIVE MARKET? Firms in...

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