Lecture_Chapter 14

Lecture_Chapter 14 - Lecture Firms in Competitive Market...

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Lecture Firms in Competitive Market (Chapter 14)
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FIRMS IN COMPETITIVE MARKETS 2 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.
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FIRMS IN COMPETITIVE MARKETS 3 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. 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.
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FIRMS IN COMPETITIVE MARKETS 4 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
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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 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 0 TR P Q MR AR $10
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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 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 0 TR = P x Q P Q TR Q MR = TR Q AR = $10 $10 $10 $10 $10 Notice that MR = P Notice that MR = P
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FIRMS IN COMPETITIVE MARKETS 7 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. MR = P is only true for firms in competitive markets.
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FIRMS IN COMPETITIVE MARKETS 8 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.
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MARKETS 9 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
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This note was uploaded on 12/02/2011 for the course ECON ECON200 taught by Professor Songhualin during the Fall '11 term at Maryland.

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Lecture_Chapter 14 - Lecture Firms in Competitive Market...

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