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Pure Competition
No one has the market power
large number of buyers and sellers
Oligopoly
small number of large firms
Monopolistic
large number of small firms
Nature of Product
homogenous/ identical OR Differientiated products
we distinguish one product from the other
Free Entry/Free Exit
any firm can enter and exit at any time
Absolute Barriers to Entry
there is a monopoly to the production of the input
Consumer Sovereignty
whether the consumers have enough information
Competitive Market
perfectly competitive market
market with many buyers and sellers
trading identical products
each buyer and seller is a price taker
firms can freely enter or exit the market
A firm in a competitive market…
tries to maximize profit.
Profit
Total revenue minus total cost (TR - TC)
Maximize Profit
produce quantity where total revenue minus total cost is greatest
Rules for Profit Maximization
if MR > MC, firm should increase output
if MC > MR, firm should decrease output
if MR = MC, profit-maximizing level of output
Marginal-Cost Curve
determines the quantity of the good the firm is willing to supply at any price
Shutdown
short-run decision not to produce anything
during a specific period of time
because of current market conditions
firm still has to pay fixed costs
Exit
long-run decision to leave the market
firm doesn’t have to pay any costs
The firm’s short-run decision to shut down
TR = total revenue
VC = variable costs
shut down if TR < VC (or P < AVC)
Competitive Firm’s Short-run Supply Curve
the portion of its marginal-cost curve that lies above average cost
Sunk Cost
a cost that has already been committed and cannot be recovered
should be ignored when making decisions
in the short run, fixed costs are sunk costs
Fixed costs are ____ relevant and are ____ in the short run
not, sunk
Firm’s Long-Run Decision
exit market if
total revenue < total costs; TR < TC (same as: P < ATC)
Enter the market if
total revenue > total costs; TR > TC (same as: P > ATC)
Competitive firm’s long-run supply curve
the portion of its marginal-cost curve that lies above average total cost
Measuring Profit
if P > ATC
profit = TR - TC = (P - ATC)Q
If P < ATC
loss = TC - TR = (ATC - P)Q
= negative profit
Why do competitive firms stay in business if they make zero profit?
total costs includes all implicit costs like the opportunity cost of the owner’s time and money.
profit = total revenue - total cost
Long-Run Supply Curve is Horizontal if:
all firms have identical costs
and costs do not change as other firms enter or exit the market
Long-run supply curve might slope upward if:
firms have different costs
or costs rise as firms enter the market
