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Competitor market
A market with many buyers & sellers trading identical products so that each buyer and seller is a price taker.
Characteristics of a competitive market
Many buyers and sellers; goods offered by sellers are largely the same; firms can freely enter/exit the market.
Total revenue from the sale of output is equal to
price * quantity.
Average Revenue (AR)
Total revenue divided by the quantity sold.
Marginal Revenue (MR)
The change in total revenue from an additional unit sold.
Profit-maximizing quantity can be found by
comparing marginal revenue and marginal cost.
If MR > MC, the firm can increase profit by
increasing output.
If MC > MR, the firm can increase profit by
decreasing output.
At a Q where MC = MR,
firms profit-maximize.
At profit-max level of output,
MC = MR.
Shutdown
The short-run decision not to produce anything during a specified period of time because of current market conditions.
Exit
Long-run decision to leave the market; if a firm does this, it will earn no revenue but have no costs as well.
When a firm shuts down temporarily,
it still must pay fixed costs.
If a firm shuts down,
it will earn no revenue and will have only FIXED costs, not variable costs.
If P < AVC,
the firm shuts down or will produce no output.
If P is above AVC, the firm will produce
the level of output where MR (P) = MC.
Short-run supply curve
The portion of its MR curve that lies above AVC.
Sunk cost
A cost that has been committed and cannot be recovered.
If TR < TC or P < ATC,
the competitive firm will exit the market in the long run.
Long-run supply curve
The MC curve above ATC.
If P > ATC,
the firm is making a profit and can remain in the market.
To get the market supply curve, we add
the quantity supplied by each firm in the market at every given price.
If firms earn profit,
this will attract new firms-- supply of product will increase (curve shifts right), price will fall, profit will decline
If firms are incurring losses,
firms will exit-- supply will decrease (shift left), price will rise, losses will decline.
When TR = TC or P = ATC,
firms that remain in the market must be making ZERO economic profit.
Why do competitive market firms stay in business if they make zero profit?
They still earn normal profit, covering all explicit and implicit costs, including opportunity cost of resources. This ensures owners are compensated fairly, making staying in business sustainable.
