Microeconomics_Chapter_14-1

Microeconomics_Chapter_14-1 - M icroeconomics Chapter 14...

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Microeconomics Chapter 14 Firms in Competitive Markets Introduction If a firm can influence the market price of the good it sells, it is said to have market power 14-1a The Meaning of Competition competitive market: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker buyers and sellers in competitive markets must accept the price that market determines and, therefore, are said to be price takers firms can freely enter or exit the market if there is free entry and exit in a competitive market, it is a powerful force shaping the long run equilibrium 14-1b The Revenue of a Competitive Firm a firm in a competitive market, like most other firms in the economy, tries to maximize profit total revenue is proportional to the amount of output average revenue: total revenue divided by the amount of output average revenue tells us how much revenue a firm receives for the typical unit sold therefore, for all firms, average revenue equals the price of the good marginal revenue: which is the change in total revenue from the sale of each additional unit of output for competitive firms, marginal revenue equals the price of the good 14-2 Profit Maximization and the Competitive Firm’s Supply Curve The Vacas can find the profit maximizing quantity by comparing the marginal revenue and marginal cost from each unit produced
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As long as marginal revenue exceeds marginal cost, increasing the quantity produced raises profit If marginal revenue is greater than marginal cost, the company should increase the production of the product because it will put more money in their pockets than it takes out If marginal revenue is less than marginal cost, the Vacas should decrease production This analysis yields three general rules for profit maximization 1 . If marginal revenue is greater than marginal cost, the firm should
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Microeconomics_Chapter_14-1 - M icroeconomics Chapter 14...

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