Firms in Competitive Markets

Firms in Competitive Markets - Firms in Competitive Markets...

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Unformatted text preview: Firms in Competitive Markets Lectures Supratim Das Gupta Key Questions to Address: • What is a perfectly competitive market? • What is marginal revenue? How is it related to average revenue? • How does a firm decide how much to produce? The quantity that maximizes profits? • What conditions determine if the firm will stay in the market in the short run or the long run? • How does the market supply curve look Characteristics of Perfect Competition 1. Many buyers and sellers in the market 2. The goods offered for sale are largely the same 3. Firms can freely enter or exit the market • Because of 1 and 2, each buyer and seller takes the market price as given— and are thus “price takers.” FI RMS I N COMPETI TI VE MARKETS 4 The Revenue of a Competitive Firm • Total revenue ( TR ) • Aver age r evenue ( AR ) • M ar ginal r evenue ( MR ) : The change in TR from selling one more unit. ∆ TR ∆ Q MR = TR = P x Q TR Q AR = = P 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 5 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 P Q MR AR $10 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 6 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 TR = P x Q P Q ∆ TR ∆ Q MR = TR Q AR = $10 $10 $10 $10 $10 7 Profit Maximization • What Q maximizes the firm’s profit? • To find the answer, “ think at the mar gin .” I f increase Q by one unit, revenue rises by MR , cost rises by MC . • I f MR > MC , then increase Q to raise profit. • I f MR < MC , then reduce Q to raise Profit Maximization 50 5 40 4 30 3 20 2 10 1 45 33 23 15 9 $5 $0 ∆ Profit = MR – MC M C MR Profi t TC TR Q At any Q with MR > MC , increasing Q raises profit....
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This note was uploaded on 06/03/2011 for the course ECON 224 taught by Professor Ozturk during the Fall '09 term at South Carolina.

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Firms in Competitive Markets - Firms in Competitive Markets...

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