Chapter 14 - Firms in Competitive Markets - Chapter 14 Firms in Competitive Markets What is a Competitive Market o Meaning of Competition competitive

Chapter 14 - Firms in Competitive Markets - Chapter 14...

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Chapter 14 – Firms in Competitive Markets What is a Competitive Market o Meaning of Competition competitive market (perfectly competitive market) Many buyers and many sellers in market Goods offered by the various sellers are largely the same Firms can freely enter or exit the market Actions of any single buyer or selling in the market have a negligible impact on the market price Buyers and sellers in competitive markets must accept the price the market determines and are said to be PRICE TAKERS o The Revenue of a competitive firm Total revenue = Price x Quantity If firm doubles amount of Milk they produce, their revenue doubles P x 2Q Average revenue = total revenue / the amount of output How much revenue a firm receives for the typical unit sold All firms: o average revenue equals the price of the good o Average revenue = Price Marginal Revenue = change in total revenue from sale of each additional unit of output Competitive firms: o Marginal revenue = price of the good Profit Maximization and the Competitive Firm’s Supply Curve Goal of a competitive firm is to maximize profit total revenue – total cost o Simple example of Profit maximization Find profit-maximizing quantity by comparing the marginal revenue and marginal cost from each unit produced Marginal Revenue > Marginal cost increasing quantity produced raises profit Marginal Revenue < Marginal cost Decreasing production profit o Marginal-cost Curve and the Firm’s Supply Decision The price line is horizontal because the firm is a price taker Price of firm’s output is the same regardless of Q that the firm decides to produce Competitive firm: firm’s price equals AR and MR 3 rules for profit maximization: MR > MC Firm can increase profit by increasing production MR < MC
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