During this lecture, look for the answer to the following questions: •What is a perfectly competitive market? •What is marginal revenue? How is it related to total and average revenue? •How does a competitive firm determine the quantity that maximizes profits? •When might a competitive firm shut down in the short run? Exit the market in the long run? •What does the market supply curve look like in the short run? In the long run? 13 Firms in Competitive Market 1
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What is a Competitive Market? •Perfectly competitive market 1.Market with many buyers and sellers 2.Trading identical products (homogeneous product) 3.Each buyer and seller is a price taker 4.Firms can freely enter or exit the market 13 Firms in Competitive Market 2
Revenue of a Competitive Firm •Competitive firm tries to maximize profit •Profit = Total Revenue - Total Cost •Total revenue: TR = P ˣ Q •Average revenue, AR = TR / Q •Marginal revenue, MR = ∆TR / ∆Q•So that, for competitive firms AR = MR = 13 Firms in Competitive Market 3