14 firms in competitive markets MV

14 firms in competitive markets MV - Chapter14...

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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 1 Chapter 14  Firms in Competitive Markets
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 2 Market Structure Every industry in the marketplace has three key characteristics: 1 .The number of firms in the industry 2. The similarity of the good or services 3. The ease with which new firms can enter the industry
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 3 The Four Market Structures MARKET STRUCTURE CHARACTERISTIC PERFECT COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLY MONOPOLY Number of firms Type of product Ease of entry Examples of industries Many Identical High Wheat Apples Many Differentiated High Selling DVDs Restaurants Few Identical or differentiated Low Manufacturing computers Manufacturing automobiles One Unique Entry blocked First-class mail delivery Tap water
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 4 The Market Demand for Wheat versus the Demand for One Farmer’s Wheat The Demand Curve for the Output of a Perfectly Competitive Firm
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 5 Total Revenue, Total Cost, Profit We assume that the firm’s goal is to maximize profit . Profit = Total revenue Total cost = P*Q – TC (Q) 0
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 6  
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 7 MR  =  P   for a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold. MR = TR / Q A competitive firm can keep increasing its output without affecting the market price. So, each one-unit increase in Q causes revenue to rise by P , i.e. , MR = P . MR = P is only true for firms in competitive markets.
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 8  
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 9 P 1 MR MC and the Firm’s Supply Decision At Q a , MC < MR . So, if increase Q, extra profit = P-MC At Q b , MC > MR . So, if reduce Q, avoid a loss= MC-P At Q 1 , MC = MR . Changing Q would lower profit. Q Costs MC Q 1 Q a Q b Rule: profit-maximizing Q occurs at where P=MR=MC
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CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 10 P 1 MR P 2 MR 2 MC and the Firm’s Supply Decision If price rises to P 2 , then the profit- maximizing quantity rises to Q 2 .
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14 firms in competitive markets MV - Chapter14...

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