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Lecture Principles of economics - Chapter 14: Firms in competitive markets

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,. | 14 Firms in Competitive Markets WHAT IS A COMPETITIVE MARKET? 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 market. WHAT IS A COMPETITIVE MARKET? As a result of its characteristics, the perfectly competitive market has the following outcomes: The actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given. WHAT IS A COMPETITIVE MARKET? A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined by the market. The Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold. TR = (P Q) The Revenue of a Competitive Firm Total revenue is proportional to the amount of output. The | 14 Firms in Competitive Markets WHAT IS A COMPETITIVE MARKET? 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 market. WHAT IS A COMPETITIVE MARKET? As a result of its characteristics, the perfectly competitive market has the following outcomes: The actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given. WHAT IS A COMPETITIVE MARKET? A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. Buyers and sellers must accept the price determined by the market. The Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold. TR = (P Q) The Revenue of a Competitive Firm Total revenue is proportional to the amount of output. The Revenue of a Competitive Firm Average revenue tells us how much revenue a firm receives for the typical unit sold. Average revenue is total revenue divided by the quantity sold. The Revenue of a Competitive Firm In perfect competition, average revenue equals the price of the good. The Revenue of a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold. MR = TR/ Q The Revenue of a Competitive Firm For competitive firms, marginal revenue equals the price of the good. Table 1 Total, Average, and Marginal Revenue for a Competitive Firm Copyright©2004 South-Western PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM’S SUPPLY CURVE The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost. Table 2 Profit Maximization: A Numerical Example Copyright©2004 South-Western Figure 1 Profit Maximization for a Competitive Firm Copyright © 2004 .