Chapter 15 - Firm Behavior and the Organization of Industry: Firms in Competitive Markets

Characteristics in Competitive Markets

characterized by many buyers and sellers, homogeneous products, free entry and exit, and perfect information. Firms in these markets are price takers, meaning they accept the market price as given and cannot influence it

Examples: agriculture, retail, services

Price Takers

firms or individuals that cannot influence the market price of a good or service. They must accept the prevailing market price and adjust their production accordingly

Price Searchers

firms that have some control over the price of their products due to product differentiation or market power. They can influence the price by changing the quantity they supply

Barriers to Entry

obstacles that prevent new competitors from easily entering an industry or market. These can include high startup costs, regulatory requirements, patents, and strong brand loyalty

Revenue

the total amount of money a firm receives from selling its goods or services. It is calculated as the product of the price per unit and the quantity sold

Marginal Revenue

the additional revenue generated from selling one more unit of a good or service. In a competitive market, MR equals the market price

Average Revenue

the total revenue divided by the quantity of goods sold. In competitive markets, AR equals the market price

Short Run Equilibrium

occurs when a firm’s marginal cost equals marginal revenue, resulting in maximized profits or minimized losses in the short run

Profit Maximizing Condition

states that firms should produce output until marginal cost (MC) equals marginal revenue (MR)

Shut Down Rule

states that a firm should temporarily cease operations if the price falls below average variable costs (AVC). This is different from going out of business, which is a permanent exit when a firm cannot cover total costs in the long run

Firm’s Short Run Supply Curve

the portion of the marginal cost curve that lies above the average variable cost curve. This indicates the quantities of output that the firm is willing to supply at different prices

Firm’s Long Run Decision to Exit or Enter a Market

firms will enter a market if there are positive economic profits and exit if there are economic losses. This decision is based on the profitability and sustainability of operations

Market Supply Curve

the horizontal summation of all individual firms' supply curves in the market. It reflects the total quantity supplied by all firms at different price levels

Conditions for Long Run Equilibrium

• Firms are making zero economic profit.

• The market price equals the minimum average total cost.

• No incentives for firms to enter or exit the market

Zero Profit Condition

occurs when total revenue equals total costs

Economic Efficiency

• Output is Maximized: Resources are used in a way that maximizes consumer satisfaction.

• Cost Minimization: Firms produce at the lowest possible cost (minimum ATC).

• Allocative Efficiency: Resources are allocated to their most valued uses, where price equals marginal cost (P = MC).

Positive Economic Profit

occurs when total revenue exceeds total costs (including both explicit and implicit costs). This is represented graphically as the area between the price line and the ATC curve above the equilibrium quantity

Breaking Even

occurs when total revenue equals total costs, resulting in zero economic profit. Graphically, this is shown where the price line intersects the ATC curve

Economic Loss

occurs when total costs exceed total revenue. This is represented graphically when the price line is below the ATC curve