Quiz7Notes - Firms in Competitive Markets 2:56:00 PM WHAT...

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Firms in Competitive Markets 19/10/2007 13:56:00 WHAT IS A COMPETITIVE MARKET? Competitive market:  many buyers and sellers, goods are very much the same,  (sometimes a third criteria for a perfectly competitive market is that firms can enter or  exit the market freely) Marginal revenue:  the change in total revenue from an additional unit sold in perfectly competitive markets, doubling production, doubles revenue  because demand does not change in response to supple. This is because the  actions of a firm or buyer have a negligible impact on the market price for all firms, P x Q = R and R/Q= average revenue,  so  average revenue =  the price of the good buyers and sellers are price takers. If sellers charge more buyers will go  elsewere. They have little incentive to charge less.  PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM’S SUPPLY CURVE Sunk cost:  a cost that has already been committed and cannot be recovered The smiths can decide at what supply the make the most profit by observing  profit (TR-TC) and choosing to supply the quantity that yields most profit or by  observing change in profit (MR-MC) and choosing to supply at a level where  marginal revenue and costs are equal. If marginal revenue exceeds marginal  cost, the firm is making more money for each addition unit than it is spending  to create that additional unit. So in this case, producing more units will  increase profit bc profit is revenue minus cost. When MR=MC, profits are  maximized. Producing one extra unit would make costs higher than revenue  received for that unit, so it is not desirable. Producing one less unit would put  revenue at higher than cost, and there would be unexploited opportunity.  P is horizontal because everyone is a price taker, price does not vary with  supply AR = Q  x P / Q = P  MR=  TR/ Q =  Q xP/ Q  = P. this holds because P is fixed in competitive 
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