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Lecture Business economics - Lecture 9: 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,. | Review of previous lecture Average total cost is total cost divided by the quantity of output. Marginal cost is the amount by which total cost would rise if output were increased by one unit. The marginal cost always rises with the quantity of output. Average cost first falls as output increases and then rises. The average-total-cost curve is U-shaped. The marginal-cost curve always crosses the average-total-cost curve at the minimum of ATC. A firm’s costs often depend on the time horizon being considered. In particular, many costs are fixed in the short run but variable in the long run. Lecture 9 Firms in Competitive Markets Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Outline What Is a Competitive Market? The Revenue of a Competitive Firm Profit Maximization The Supply Curve in a Competitive Market Why the Long Run Supply Curve Might Slope Upward What Is A Competitive Market? A perfectly competitive market characteristics are: There are many buyers and sellers in . | Review of previous lecture Average total cost is total cost divided by the quantity of output. Marginal cost is the amount by which total cost would rise if output were increased by one unit. The marginal cost always rises with the quantity of output. Average cost first falls as output increases and then rises. The average-total-cost curve is U-shaped. The marginal-cost curve always crosses the average-total-cost curve at the minimum of ATC. A firm’s costs often depend on the time horizon being considered. In particular, many costs are fixed in the short run but variable in the long run. Lecture 9 Firms in Competitive Markets Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Outline What Is a Competitive Market? The Revenue of a Competitive Firm Profit Maximization The Supply Curve in a Competitive Market Why the Long Run Supply Curve Might Slope Upward What Is A Competitive Market? A perfectly competitive market characteristics are: 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. Perfect information on both sides of market. No transaction costs. 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. 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) Total revenue is proportional to the amount of output. 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. In perfect competition, average revenue equals the