Chapter 14: Firms in Competitive Markets Flashcards
Define ‘Competitive market’.
A market in which there are many buyers and many sellers so that each has negligible impact on the market price.
Define ‘Average revenue’.
Total revenue divided by the quantity sold.
Define ‘Marginal revenue’.
The change in total revenue from an additional unit sold.
Define ‘Sunk cost’.
A cost that has already been committed and cannot be recovered.
Because a competitive firm is a price taker, its ___ is proportional to the amount of output it produces. The price of the good equals both the firm’s ___ ___ and its ___ ___ (in a competitive market).
Revenue.
Average revenue and marginal revenue (P=AV=MR).
To maximize profit, a firm chooses a quantity of output such that marginal revenue equals ___ ___. Because marginal revenue for a competitive firm equals the market price, the firm chooses quantity so that price equals ___ ___. Thus, the firm’s marginal-cost curve is its ___ ___.
Marginal cost (max profit when MR=MC). Marginal cost (max profit when P=MR=MC). Supply curve.
When will a firm choose to shut down temporarily? Exit the market?
Shut down temporarily (short-run): P < AVC (and cannot recover FC). (Also, TR < VC, divide by Q)
Exit (long-run): P < ATC (can recover FC and VC). (Also, TR < TC, divide by Q)
In a market with free entry and exit, profits are driven to ___ in the long-run. In this long-run equilibrium, all firms produce at the efficient scale, price equals the min. of average total cost, and the number of firms adjusts to satisfy the quantity demanded at this price.
Zero.
How does changes in demand effect things in the short-run? Long-run?
In the short run, an increase in demand raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses.
If firms can freely enter and exit the market, then in the long run the number of firms adjusts to drive the market back to the zero-profit equilibrium (with increased quantity for increased demand).
What are the three 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.
If MR>MC, the firm should ___ its output.
If MR
Increase.
Decrease.
How is profit measured?
Profit = TR - TC, divide by Q
-> Profit = (P - ATC) x Q
When are losses experience? Profit?
When price is below, or above, the ATC curve on a diagram.
A long-run supply curve is horizontal, but may slope upwards when…?
- Some resources used in production may be available only in limited quantities and thus demand causes an increase in price of these inputs and a necessary increase in price when greater demand to cover higher associated costs.
- Firms with different costs to give incentive for more firms to enter (firms with lower costs will be making profits at these higher prices, zero profit only for marginal firm).
