Summary
Summary Chapter 14 - Firms in the Competitive Market
- Course
- Institution
- Book
My Chapter 14 notes about 'Firms in the Competitive Market' including tables and graphs
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Mankiw Principles of Microeconomics Summary
-
Saving, Investment, and the Financial System N.Gregory Mankiw Principles of Economics Eighth Edition
-
GDP-Production and Growth
Seller
Followlucaallaart
Reviews received
Content preview
Chapter 14 - Firms in Competitive MarketsWhat is a Competitive Market
The meaning of competition
A competitive market, sometimes called a perfectly competitive market, has two
characteristics:
1. There are many buyers and many sellers in the market.
2. The goods offered by the various sellers are largely the same
As a result of these conditions, the actions of any single buyer or seller 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, therefore, are said to be price takers. There is also a
third condition thought to characterize perfectly competitive markets is that firms can enter
and exit the market freely.
The Revenue of a Competitive Firm
A firm in a competitive market, like most other firms in the economy, tries to
maximize profit, which equals total revenue minus total cost. There are five
things to remember when taking revenue into account. Quantity (Q), Price (P),
Total Revenue (TR = P x Q), Average Revenue (AR = TR/Q), and Marginal
Revenue (MR = ∆TR/∆Q).
Profit Maximization and the Competitive Firm’s Supply Curve
The goal of a competitive firm is to maximize profit, which equals total revenue minus total
cost.
A Simple Exam of Profit Maximization
Q TR TC Profit MR MC ∆ in Profit
0 0 3 -3
1 6 5 1 6 2 4
2 12 8 4 6 3 3
3 18 12 6 6 4 2
4 24 17 7 6 5 1
5 30 23 7 6 6 0
6 36 30 6 6 7 -1
7 42 38 4 6 8 -2
8 48 47 1 6 9 -3
The Marginal-Cost Curve and the Firm’s Supply Decision
, If the firm is producing at Q1, then it is making a profit because the MC is below the MR. If
the firm is producing at Q2, then the MC is above the MR and will be losing money and
making a loss. If the firm produces at Qmax, it will be maximizing its profit because the
marginal cost is equal to the marginal revenue if you increase or decrease production by 1,
the firm won't be maximizing its profits anymore. Three general rules to follow:
1. If marginal revenue is greater than marginal cost, the firm should increase its output.
2. If marginal cost is greater than marginal revenue, the firm should decrease its output.
3. At the profit-maximizing level of output, marginal revenue and marginal cost are
exactly equal.
These rules are the key to rational decision making by a profit-maximizing firm. Because the
firm’s marginal-cost curve determines the quantity of the good the firm is willing to supply at
any price, the marginal cost curve is also the competitive firm's supply curve.
The Firm’s Short-Run Decision to Shut Down
In certain circumstances, however, the firm will decide to shut down and not produce
anything at all. A shutdown refers to a short-run decision not to produce anything during a
specific period of time because of current market conditions. Exit refers to a long-run
decision to leave the market. The short-run and long-run decision differ because most firms
cannot avoid their fixed costs in the short run but can do so in the long run. Let’s consider
what determines a firm’s shutdown decision. If the firm shuts down, it loses all revenue from
the sale of its product. At the same time, it saves the variable costs of making its products.
Thus the firm shuts down if the revenue that it would get from producing is less than its
variable costs of production.
● Shutdown if TR<VC
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller lucaallaart. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for CA$4.58. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
75632 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now