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Chapter 14 vocabulary

Chapter 14 vocabulary - average revenue o Total revenue...

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o average revenue Total revenue divided by the quantity sold. o competitive market A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. o marginal revenue The change in total revenue from an additional unit sold. o sunk cost A cost that has already been committed and cannot be recovered. Chapter Recap: Summary o Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. The price of the good equals both the firm's average revenue and its marginal revenue. o To maximize profit, a firm chooses a quantity of output such that marginal revenue equals marginal cost. Because marginal revenue for a competitive firm equals the market price, the firm chooses quantity so that price equals marginal cost. Thus, the firm's marginal-cost curve is its supply curve. o In the short run when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost. o In a market with free entry and exit, profits are driven to zero in the long run. In this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price. o Changes in demand have different effects over different time horizons. In the short run, an increase in demand raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses. But if firms can freely enter and exit the market, then in the long run, the number of firms adjusts to drive the market back to the zero-profit equilibrium. Chapter Recap: Questions for Review 1. What is meant by a competitive firm? 2. Explain the difference between a firm's revenue and its profit. Which do firms maximize? 3. Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of output that maximizes profit. At that level of output, show on your graph the total revenue of the firm. Show its total costs. 1
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4. Under what conditions will a firm shut down temporarily? Explain.
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Chapter 14 vocabulary - average revenue o Total revenue...

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