In this chapter we examine the behavior of competitive firms, such as your local gas station. After completing this chapter, students will be able to learn what characteristics make a market competitive, examine how competitive firms decide how much output to produce, examine how competitive firms decide when to shut down production temporarily,...
Trang 1Firms in Competitive Markets
Chapter 14
Copyright © 2001 by Harcourt, Inc.
Trang 2The Meaning of Competition
A perfectly competitive market has the following characteristics:
There are many buyers and sellers in the market.
The goods offered by the various sellers are largely the same.
Firms can freely enter or exit the
Trang 3The Meaning of Competition
Each buyer and seller takes the market price as given
Trang 4Example of Competitive Markets
Eggs vs. Nike Sneakers.
Pay attention to the difference between the two market
structures.
Which brand names
do you recognize?
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Trang 5Revenue of a Competitive Firm
Total revenue for a firm is the selling
price times the quantity sold.
TR = (P X Q)
Trang 6Revenue of a Competitive Firm
Marginal revenue is the change in total revenue from an additional unit
sold.
MR = TR/ Q
Trang 7Revenue of a Competitive Firm
revenue equals the price of the
good.
Trang 8Total, Average, and Marginal Revenue for a Competitive Firm
Quantity
(Q)
Price (P)
Total Revenue (TR=PxQ)
Average Revenue (AR=TR/Q)
Marginal Revenue (MR= )
Trang 9Profit Maximization for the
Trang 10Total Revenue (TR=PxQ)
Total Cost (TC)
Profit (TRTC)
Marginal Revenue (MR= )
Marginal Cost MC=
Trang 11ATC AVC
The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc
Trang 12Profit Maximization for the
Competitive Firm
Profit maximization occurs at the quantity where marginal revenue equals marginal cost.
Trang 13Profit Maximization for the
Competitive Firm
When MR > MC increase Q When MR < MC decrease Q
When MR = MC Profit is maximized
Trang 14The Interaction of Firms and
Trang 15The Marginal-Cost Curve and the
Firm’s Supply Decision
Costs and Revenue
MC
ATC AVC
Copyright © 2001 by Harcourt, Inc. All rights reserved
P1
P2
This section of the firm’s MC curve is also the firm’s supply curve (longrun).
Trang 16The Firm’s Short-Run Decision
to Shut Down
A shutdown refers to a shortrun decision not to produce anything during a specific period of time because of current market
conditions.
leave the market.
Trang 17The Firm’s Short-Run Decision
to Shut Down
when deciding to exit, but ignores them when deciding whether to shut down.
already been committed and cannot
Trang 18The Firm’s Short-Run Decision
to Shut Down
The firm shuts down if the revenue it gets from producing is less than the variable cost of production.
Shut down if TR < VC Shut down if TR/Q < VC/Q
Shut down if P < AVC
Trang 19The Firm’s Short-Run Decision to Shut Down
ATC AVC
at a profit.
Firm’s shortrun supply curve.
Trang 20The Firm’s Short-Run Decision
to Shut Down
The portion of the marginalcost curve that lies above average
variable cost is the competitive
Trang 21The Firm’s Long-Run Decision
to Exit or Enter a Market
In the longrun, the firm exits if the revenue it would get from producing is less than its total cost.
Exit if TR < TC Exit if TR/Q < TC/Q
Exit if P < ATC
Trang 22The Firm’s Long-Run Decision
to Exit or Enter a Market
A firm will enter the industry if such an action would be profitable
Enter if TR > TC Enter if TR/Q > TC/Q
Enter if P > ATC
Trang 23The Competitive Firm’s
Long-Run Supply Curve
MC = Longrun S
ATC AVC