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Unformatted text preview: CHAPTER 14: FIRMS IN COMPETITIVE MARKETS Key Questions Characteristics of a competitive market Competitive firms’ decision on how much output to produce when to shut down production temporarily whether to exit or enter a market How firm behavior determines a markets’ short-run and long-run supply curve 1. What is a Competitive Market? 1.1. The meaning of competition DEF : COMPETITIVE MARKET: A market with many buyers & sellers trading identical products so each buyer & seller is a price taker. Characteristics of Competitive Markets (often called perfectly competitive) • Many buyers and sellers • Actions of buyers & sellers don’t affect market price all are price takers • Homogenous (identical) Product – Goods offered by the sellers are same • Free entry and exit, no barriers 1.2. Revenue of Competitive Firm Goal of a competitive firm = max profit ( =TR-TC ) Π Price does not depend on the quantity one person decides to produce and sell. So TR is proportional to output. DEF : AVERAGE REVENUE: TR/Q DEF : MARGINAL REVENUE: TR/ Q Δ Δ TR = P*Q AR = TR/Q = (P*Q) / Q = P MR = delta TR / delta Q (When Q rises by 1 unit, TR rises by...
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This note was uploaded on 12/10/2009 for the course ECON 2010 at Colorado.