Firms in Competitive Markets

Vocabulary practice flashcards covering the concepts of competitive markets, revenue calculations, profit maximization rules, and supply curve dynamics from Chapter 14.

Competitive Market

Also called a perfectly competitive market; characterized by many buyers and sellers trading identical products, such that each buyer and seller is a price taker and firms can freely enter or exit the market.

Price Taker

A buyer or seller in a competitive market who must accept the market price as given, as their individual actions have no impact on the price.

Total Revenue ($TR$)

The price of the good multiplied by the quantity sold, calculated as $TR = P \times Q$, and is proportional to the amount of output.

Average Revenue ($AR$)

Total revenue divided by the quantity sold, calculated as $AR = \frac{TR}{Q}$; for competitive firms, $AR = P$.

Marginal Revenue ($MR$)

The change in total revenue from an additional unit sold, calculated as $MR = \frac{\Delta TR}{\Delta Q}$; for competitive firms, $MR = P$.

Profit Maximization Rule

A firm maximizes profit by producing the quantity where marginal revenue equals marginal cost ($MR = MC$).

Marginal-Cost Curve

An upward-sloping curve that determines the quantity of the good the firm is willing to supply at any price; it serves as the firm's supply curve.

Shutdown

A short-run decision not to produce anything during a specific period of time because of current market conditions, though the firm still must pay fixed costs.

Exit

A long-run decision to leave the market, resulting in the firm not having to pay any costs.

Short-Run Shutdown Decision Criteria

The firm should shut down if total revenue is less than variable costs ($TR < VC$) or if price is less than average variable cost ($P < AVC$).

Competitive Firm’s Short-Run Supply Curve

The portion of the marginal-cost ($MC$) curve that lies above the average variable cost ($AVC$) curve.

Sunk Cost

A cost that has already been committed and cannot be recovered; it should be ignored when making decisions. In the short run, fixed costs are considered sunk costs.

Long-Run Exit Decision Criteria

The firm should exit the market if total revenue is less than total costs ($TR < TC$), which is equivalent to price being less than average total cost ($P < ATC$).

Long-Run Entry Decision Criteria

A firm should enter the market if total revenue is greater than total costs ($TR > TC$), which is equivalent to price being greater than average total cost ($P > ATC$).

Competitive Firm’s Long-Run Supply Curve

The portion of its marginal-cost ($MC$) curve that lies above the average total cost ($ATC$) curve.

Zero-Profit Equilibrium

A state where firms remaining in the market make zero economic profit, occurring when $P = ATC$.

Efficient Scale

The level of production where a firm operates at the minimum of its average total cost ($ATC$), where $MC = ATC$.

Economic Profit vs. Accounting Profit

In a zero-profit equilibrium, economic profit is zero because total cost includes all opportunity costs, while accounting profit remains positive.

Long-Run Market Supply Curve

In the simplest case where firms have the same costs and free entry/exit, it is perfectly elastic and horizontal at the minimum of the average total cost ($ATC$).