Chapter 14 - Firms In Competive Markets

Question 1

Competitive Market

Answer 1

A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.

Question 2

Average Revenue

Answer 2

Total Revenue / Quantity = Average Revenue

Question 3

Marginal Revenue

Answer 3

Change in Total Revenue from an addition unit sold.

Question 4

Sunk Cost

Answer 4

A cost that has already been committed and cannot be recovered.

Question 5

Characteristics of a Perfectly Competitive Firm

Answer 5

1. Large number of small firms.
2. Each firm is producing a homogeneous product.
3. Each firm is a price taker.
4. Low barriers of entry.
5. No non-price competition. (No advertising)

Question 6

What is a homogeneous product?

Answer 6

A product that is the same across the board.

Example. Milk, Eggs, Flour, Sugar

Question 7

Demand Curve of a Perfectly Competitive Market

Answer 7

Because each firm is a price taker, it faces a perfectly elastic demand curve.
(Completely horizontal across the graph)

Question 8

How does a firm MAXamize profits or MINimize its losses?

Answer 8

Every firm maximizes profits of minimizes losses by producing where marginal cost and marginal revenue are equal.