Chapter 14 Notes - Chapter 14 Market power ability of a...

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Chapter 14 Market power- ability of a firm to influence the market for the product it sells Perfectly competitive market- many buyers and sellers in the market -the goods offered by different sellers are largely the same -firms can freely enter and exit the market buyers and sellers are price takers b/c their individual actions will not have an affect on the market determined price average revenue- AR = TR/Q = the price of the good MR > MC means profits rise – should increase production MR< MC means profits decline – should decrease production b/c of diminishing marginal returns change in profits = 0 where MR and MC are equal; this is the profit maximizing level marginal cost curve determines the amount of a good a firm is willing to produce so it also acts as the firms supply curve shutdown- short term decision to not produce still has to pay fixed costs- referred to as sunk costs in this circumstance a firm shuts down if the potential revenue is less than variable costs of production
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