CH14 - CHAPTE R 14 FirmsinCompetitiveMarkets Economics2106...

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C H A P T E  R Firms in Competitive Markets Firms in Competitive Markets Economics - 2106 B-C Kim 14
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In this chapter,  In this chapter,  look for the answers to these questions: look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine the quantity that maximizes profits? When might a competitive firm shut down in the short run? Exit the market in the long run? What does the market supply curve look like in the short run? In the long run? 2
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FIRMS IN COMPETITIVE MARKETS 3 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 4 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 5 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 6 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 7 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 8 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 9 Profit Maximization What Q maximizes the firm’s profit? To find the answer, “
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This note was uploaded on 01/25/2012 for the course ECON 2106 taught by Professor Minjaesong during the Fall '06 term at Georgia Institute of Technology.

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CH14 - CHAPTE R 14 FirmsinCompetitiveMarkets Economics2106...

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