Chap_14 - CharacteristicsofPerfectCompetition 1. Many...

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FIRMS IN COMPETITIVE MARKETS 1 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. 0
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FIRMS IN COMPETITIVE MARKETS 2 The Revenue of a Competitive Firm Total revenue ( TR ) Average revenue ( AR ) Marginal revenue ( MR ) : The change in TR from selling one more unit. TR Q MR = TR = P x Q TR Q AR = = P 0
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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Calculating  Calculating  TR TR AR AR MR MR 3 Fill in the empty spaces of the table. $50 $10 5 $40 $10 4 $10 3 $10 2 $10 $10 1 n/a $10 0 TR P Q MR AR $10 0
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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Answers Answers 4 Fill in the empty spaces of the table. $50 $10 5 $40 $10 4 $10 3 $10 $10 $10 $10 $10 2 $10 $10 1 n/a $30 $20 $10 $0 $10 0 TR = P x Q P Q TR Q MR = TR Q AR = $10 $10 $10 $10 $10 Notice that MR = P 0
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FIRMS IN COMPETITIVE MARKETS 5 MR  =  P   for a Competitive Firm 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. 0
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FIRMS IN COMPETITIVE MARKETS 6 Profit Maximization What Q maximizes the firm’s profit? To find the answer, “ think at the margin .” If increase Q by one unit, revenue rises by MR , cost rises by MC . If MR > MC , then increase Q to raise profit. If MR < MC , then reduce Q to raise profit. 0
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FIRMS IN COMPETITIVE MARKETS 7 Profit Maximization 50 5 40 4 30 3 20 2 10 1 45 33 23 15 9 $5 $0 0 Profit = MR MC MC MR Profit TC TR Q At any Q with MR > MC , increasing Q raises profit. 5 7 7 5 1 –$5 10 10 10 10 –2 0 2 4 $6 12 10 8 6 $4 $10 (continued from earlier exercise) At any Q with MR < MC , reducing Q raises profit. 0
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8 P 1 MR MC and the Firm’s Supply Decision At Q a , MC < MR . So, increase Q to raise profit. At Q b , MC > MR . So, reduce Q to raise profit. At
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This note was uploaded on 04/20/2011 for the course ECON 130 taught by Professor Kikuchi,g during the Fall '08 term at University of Hawaii, Manoa.

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Chap_14 - CharacteristicsofPerfectCompetition 1. Many...

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