Chapter 14 - end

Chapter 14 - end - Chapter14Firmsinacompetitivemarket

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Chapter 14 – Firms in a competitive market 18:11 eCharacteristics of Perfect Competition Many buyers and many sellers. The goods offered for sale are largely the same. Firms can freely enter or exit the market. In a perfectly competitive market, firms are  price takers The revenue of a competitive firm Total Revenue: TR=PxQ Average Revenue: AR = TR/Q = P Marginal revenue: MR= change in TR / change in Q 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 Profit Maximization What Q maximizes the firm’s profit? To find the answer “ think at the margin” Shutdown vs. Exit Shutdown – long run decision to leave the market Exit – short term decision to leave the market A key difference: If shut down in SR, must still pay FC.
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A Firm’s Short-run decision to shut down Cost of shutting down: revenue loss = TR Benefit of shutting down: cost savings = VC So, shut down if TR < VC Divide both sides by Q: TR/Q < VC/Q If P < AVC, then firms shut down The Irrelevance of Sunk Costs Sunk cost:  a cost that has already been committed and cannot be recovered Sunk costs should be irrelevant to decisions; you must pay them regardless of your  choice. A Firm’s Long-Run Decision to Exit Cost of exiting the market: revenue loss = TR Benefit of exiting the market: cost savings = TC    (zero FC in the long run) So, firm exits if TR < TC Divide both sides by Q to write the firm’s decision rule as: EXIT IF P < ATC A new Firm’s Decision to Enter the Market In the long run, a firm will enter the market if TR > TC Market Supply: Assumptions All existing firms and potential entrants have identical costs. Each firm’s costs do not change as other firms enter or exit the market
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The number of firms in the market is Fixed in the short run Variable in the long run The SR Market Supply Curve As long as P > AVC, each firm will produce its profit-maximizing quantity, where MR =  MC
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This note was uploaded on 01/22/2012 for the course ECON 102 taught by Professor Yotsubo during the Fall '08 term at Rutgers.

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Chapter 14 - end - Chapter14Firmsinacompetitivemarket

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