Chapter 14 - CHAPTER14: KeyQuestions

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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 
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