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rket
Characteristics
A perfectly competitive market has the followi
ng characteristics:
There are many buyers and sellers in the mark
et.
The goods offered by the various sellers are la
rgely the same.
Firms can freely enter or exit the market.
Outcomes
As a result of its characteristics, the perfectly
Price Takers
A competitive market has many buyers and s
Total Revenue
Total revenue for a firm is the selling price times t
he quantity sold.
TR = (P Q)
Total revenue is proportional to the amount of
output.
Average Revenue
Average revenue tells us how much revenue
Average Revenue=Price
T o ta l re v e n u e
A v e ra g e R e v e n u e =
Q u a n tity
P ric e Q u a n tity
Q u a n tity
P ric e
Marginal Revenue
Marginal revenue is the change in total reven
P=AR=MR
For competitive firms,
Numerical Example
profit.
This means that the firm will want to produce
the quantity that maximizes the difference bet
ween total revenue and total cost.
Profit maximization occurs at the quantity whe
re marginal revenue equals marginal cost.
MC
MC2
ATC
P = MR1 = MR2
AVC
P = AR = MR
MC1
Q1
QMAX
Q2
Quantity
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Shutdown or Exit?
A shutdown refers to a short-run decision not
Sunk Costs
The firm considers its sunk costs when decidi
Firms short-run
supply curve
MC
ATC
If P > AVC, firm will
continue to produce
in the short run.
AVC
Firm
shuts
down if
P< AVC
0
Quantity
would be profitable.
Enter if TR > TC
Enter if TR/Q > TC/Q
Enter if P > ATC
Costs
Firms long-run
supply curve
Firm
enters if
P > ATC
MC = long-run S
ATC
Firm
exits if
P < ATC
Quantity
Summary
Short-Run Supply Curve
The portion of its marginal cost curve that lies
above average variable cost.
Long-Run Supply Curve
ATC
Profit
P
ATC
P = AR = MR
Quantity
Q
(profit-maximizing quantity)
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MC
ATC
ATC
P
P = AR = MR
Loss
Q
(loss-minimizing quantity)
Quantity
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Price
MC
Supply
$2.00
$2.00
1.00
1.00
100
200
Quantity (firm)
100,000
s driven to zero.
In the long run, price equals the minimum of a
verage total cost.
The long-run market supply curve is horizonta
l at this price.
Price
MC
ATC
P = minimum
ATC
Supply
Quantity (firm)
Quantity (market)
Long-Run Equilibrium
At the end of the process of entry and exit, fir
the firm.
In the zero-profit equilibrium, the firms reven
ue compensates the owners for the time and
money they expend to keep the business goi
ng.
Firm
Price
Price
MC
ATC
P1
Short-run supply, S1
P1
Long-run
supply
Demand, D1
Quantity (firm)
Q1
Quantity (market)
Firm
Price
Price
Profit
MC
ATC
P2
P2
P1
P1
S1
A
D2
Long-run
supply
D1
0
Quantity (firm)
Q1
Q2
Quantity (market)
Firm
Price
Price
MC
ATC
P1
P2
P1
S1
S2
C
Long-run
supply
D2
D1
0
Quantity (firm)
Q1
Q2
Q3 Quantity (market)