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 .
