FirmsinCompetitiveMarketsChapter14Copyright©2001byHarcourt,Inc.Allrightsreserved. Requestsforpermissiontomakecopiesofanypartoftheworkshouldbemailedto:PermissionsDepartment,HarcourtCollegePublishers,6277SeaHarborDrive,Orlando,Florida32887-6777.TheMeaningofCompetitionAperfectlycompetitivemarkethasthefollowingcharacteristics:Therearemanybuyersandsellersinthemarket.Thegoodsofferedbythevarioussellersarelargelythesame.Firmscanfreelyenterorexitthemarket.TheMeaningofCompetitionAsaresultofitscharacteristics,theperfectlycompetitivemarkethasthefollowingoutcomes:Theactionsofanysinglebuyerorsellerinthemarkethaveanegligibleimpactonthemarketprice.Eachbuyerandsellertakesthemarketpriceasgiven.TheMeaningofCompetitionBuyersandsellersincompetitivemarketsaresaidtobepricetakers.Buyersandsellersmustacceptthepricedeterminedbythemarket.RevenueofaCompetitiveFirmTotalrevenueforafirmisthesellingpricetimesthequantitysold.TR=(PXQ)RevenueofaCompetitiveFirmTotalrevenueisproportionaltotheamountofoutput.RevenueofaCompetitiveFirmAveragerevenuetellsushowmuchrevenueafirmreceivesforthetypicalunitsold.RevenueofaCompetitiveFirmInperfectcompetition,averagerevenueequalsthepriceofthegood.RevenueofaCompetitiveFirmMarginalrevenueisthechangeintotalrevenuefromanadditionalunitsold.MR=TR/QRevenueofaCompetitiveFirmForcompetitivefirms,marginalrevenueequalsthepriceofthegood.Total,Average,andMarginalRevenueforaCompetitiveFirmProfitMaximizationfortheCompetitiveFirmThegoalofacompetitivefirmistomaximizeprofit.Thismeansthatthefirmwillwanttoproducethequantitythatmaximizesthedifferencebetweentotalrevenueandtotalcost.ProfitMaximization:ANumericalExampleP=AR=MRP=MR1MCProfitMaximizationfortheCompetitiveFirm...Quantity0CostsandRevenueATCAVCQMAXThefirmmaximizesprofitbyproducingthequantityatwhichmarginalcostequalsmarginalrevenue.MC1Q1MC2Q2Harcourt,Inc.itemsandderiveditemscopyright©2001byHarcourt,Inc.ProfitMaximizationfortheCompetitiveFirmProfitmaximizationoccursatthequantitywheremarginalrevenueequalsmarginalcost.ProfitMaximizationfortheCompetitiveFirmWhenMR>MCincreaseQWhenMR
AVC,keepproducingintheshortrun.IfP>ATC,keepproducingataprofit.Firm’sshort-runsupplycurve.TheFirm’sShort-RunDecisiontoShutDownTheportionofthemarginal-costcurvethatliesaboveaveragevariablecostisthecompetitivefirm’sshort-runsupplycurve.TheFirm’sLong-RunDecisiontoExitorEnteraMarketInthelong-run,thefirmexitsiftherevenueitwouldgetfromproducingislessthanitstotalcost.ExitifTRTCEnterifTR/Q>TC/QEnterifP>ATCTheCompetitiveFirm’sLong-RunSupplyCurve...QuantityMC=Long-runSATCAVC0CostsFirmentersifP>ATCFirmexitsifPAVC,keepproducingintheshortrun.IfP>ATC,keepproducingataprofit.Firm’sshort-runsupplycurve.TheCompetitiveFirm’sLong-RunSupplyCurve...QuantityMC=Long-runSATCAVC0CostsFirmentersifP>ATCFirmexitsifP
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