Chapter 14 - Firms in Competitive Markets Flashcards
What are the two characteristics of a perfectly competitive market?
- There are many buyers and many sellers in the market
- The goods offered by the various sellers are largely the same.
- Firms can freely enter or exit the market in the long run.
Define Price Takers.
A buyer or seller who takes the price as given by market conditions.
Define Average Revenue.
Total revenue divided by the quantity sold.
Define Marginal Revenue.
The change in total revenue from an additional unit sold.
What is the goal of a competitive firm?
To maximise profit = Total Revenue - Total Cost.
Why is a competitive firm’s revenue proportional to the amount of output it produces?
Because a competitive firm is a price taker. The price of the good equal both the firm’s average revenue and it’s marginal revenue.
Define Marginal Revenue.
The extra revenue received from selling one more unit of output. In perfect competition this is equal to price (MR=P).
The firm will increase it’s output as long as ?
Each additional unit sold adds more to total revenue than to total cost. (MR>MC)
What is the ‘golden rule’ of profit maximisation?
MR=MC
What are the 4 short run profit positions of a firm?
- Pure economic profit (P AVC)
4. Shut Down (P
Describe all the cost curves.
- Marginal-cost curve (MC) - upward sloping
- Average-total-cost curve (ATC) - U-shaped
- Marginal cost curve crosses the ATC at the min of ATC and AVC.
Define Shutdown.
A short-run decision to produce nothing for a specific period of time.
Define exit.
A long-run decision to leave the market.
Define sunk cost.
A cost that has already been committed and cannot be recovered.
