Firms in Competitive Markets

This set of vocabulary flashcards covers key concepts of perfectly competitive markets, revenue calculations, profit maximization rules, and the criteria for market entry, exit, and shutdown based on lecture notes from Chapter 14.

Competitive market

A market with many buyers and many sellers trading identical products, such that each buyer and seller is a price taker and firms can freely enter or exit the market.

Profit

Total revenue minus total cost.

Total revenue ($TR$)

The price of the goods times the quantity sold, calculated as $P \times Q$.

Average revenue ($AR$)

Total revenue divided by the quantity sold ($TR / Q$); for competitive firms, it is equal to the price ($P$).

Marginal revenue ($MR$)

The change in total revenue from an additional unit sold ($\Delta TR / \Delta Q$); for competitive firms, it is equal to the price ($P$).

Profit Maximization Rule

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

Shutdown

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

Exit

A long-run decision to leave the market, after which the firm does not have to pay any costs.

Short-run Shutdown Condition

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

Competitive Firm's Short-Run Supply Curve

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

Sunk cost

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

Long-run Exit Condition

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

Competitive Firm's Long-Run Supply Curve

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

Profit Formula (as Area)

$Profit = (P - ATC) \times Q$; this applies when price is greater than average total cost.

Loss Formula (as Area)

$Loss = (ATC - P) \times Q$; this occurs when price is less than average total cost, resulting in negative profit.

Efficient scale

The quantity of production where marginal cost equals average total cost ($MC = ATC$) at the minimum of the $ATC$ curve.

Zero-profit equilibrium

The long-run process of entry and exit ends when firms in the market make zero economic profit ($P = ATC$), though accounting profit remains positive because total cost includes opportunity costs.