Firms in Competitive Markets

Flashcards covering key concepts related to firms in competitive markets, including market structures, revenue, profit maximization, and supply decisions in both the short run and the long run.

Perfectly Competitive Market

Market with many buyers and sellers trading identical products, where each participant is a price taker, and firms can freely enter or exit.

Total Revenue (TR)

Price (P) multiplied by Quantity (Q): TR = P x Q

Average Revenue (AR)

Total Revenue (TR) divided by Quantity (Q): AR = TR / Q; For competitive firms, AR = P

Marginal Revenue (MR)

Change in Total Revenue (∆TR) from an additional unit sold (∆Q): MR = ∆TR / ∆Q; For competitive firms, MR = P

Profit Maximization Rule

Maximize profit at the quantity (Q) where Marginal Revenue (MR) equals Marginal Cost (MC).

Shutdown (Short Run)

A short-run decision not to produce anything because of market conditions; occurs if Total Revenue (TR) is less than Variable Cost (VC), or Price (P) is less than Average Variable Cost (AVC).

Exit (Long Run)

A long-run decision to leave the market; occurs if Total Revenue (TR) is less than Total Cost (TC), or Price (P) is less than Average Total Cost (ATC).

Sunk Cost

A cost that has already been committed and cannot be recovered; irrelevant for short-run shutdown decisions.

Zero Economic Profit

Occurs in long-run equilibrium when Price (P) equals Average Total Cost (ATC), meaning firms earn an accounting profit but no economic profit.

SR Market Supply Curve

The sum of the quantities supplied by all firms at each price, as long as Price (P) is greater than or equal to Average Variable Cost (AVC).

LR Market Supply Curve

In the long run, the market supply curve is horizontal at the minimum of Average Total Cost (ATC), assuming firms have identical costs and costs don't change with entry/exit.