Ch14 - Chapter 14: Firms in Competitive Markets In this...

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Unformatted text preview: Chapter 14: Firms in Competitive Markets In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine the quantity that maximizes profits? When might a competitive firm shut down in the short run? Exit the market in the long run? What does the market supply curve look like in the short run? In the long run? +.RMS .N (OMP*T.T.V* M&RK*TS Introduction: A Scenario Three years after graduating, you run your own business. You must decide how much to produce, what price to charge, how many workers to hire, etc . What factors should affect these decisions? Your costs (studied in preceding chapter) How much competition you face We begin by studying the behavior of firms in perfectly competitive markets. +.RMS .N (OMP*T.T.V* M&RK*TS Characteristics of Perfect Competition 1. Many buyers and many sellers. 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. Because of 1 ¡ 2, each buyer and seller is a “ price taker ” – takes the price as given. +.RMS .N (OMP*T.T.V* M&RK*TS The Revenue of a Competitive Firm Total revenue ( TR ) Average revenue ( 28 ) Marginal revenue ( 38 ) : The change in TR from selling one more unit. ∆ T R ∆ 7 MR = TR = 6 x 7 TR 7 &R = = 6 A C T I V E L E A R N I N G % Calculating D8 , 28 , 38 Fill in the empty spaces of the table. ¡50 ¡10 5 ¡40 ¡10 4 ¡10 3 ¡10 2 ¡10 ¡10 1 n/a ¡10 TR 6 7 MR &R ¡10 +.RMS .N (OMP*T.T.V* M&RK*TS 38 = 6 for a Competitive Firm A competitive firm can keep increasing its output without affecting the market price. So, each one-unit increase in 7 causes revenue to rise by 6 , i¡e¡ , MR = 6 . MR = 6 is only true for firms in competitive markets. +.RMS .N (OMP*T.T.V* M&RK*TS Profit Maximization What 7 maximizes the firm’s profit? To find the answer, “ think Qt thU mQrgin .” If increase 7 by one unit, revenue rises by MR , cost rises by M( . If MR > M( , then increase 7 to raise profit. If MR < M( , then reduce 7 to raise profit. +.RMS .N (OMP*T.T.V* M&RK*TS Profit Maximization 50 5 40 4 30 3 20 2 10 1 45 33 23 15 9 ¡5 ¡0 ¡ Profit = MR – M( M( MR Profit T( TR 7 At any 7 with MR > M( , increasing 7 raises profit....
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This note was uploaded on 03/22/2011 for the course ECON 200 taught by Professor Ta during the Spring '07 term at University of Washington.

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Ch14 - Chapter 14: Firms in Competitive Markets In this...

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