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The Firms and the Competitive Market
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The Firms and the Competitive Market

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This presentation basically tells how the firm makes decisions in a competitive market. To make concepts here more understable, I have prepared graphs and mathematical equations.

This presentation basically tells how the firm makes decisions in a competitive market. To make concepts here more understable, I have prepared graphs and mathematical equations.

Published in: Economy & Finance, Education
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  • 1. PERFECTLY COMPETITIVE MARKET Prepared by: Richard L. Toledo
  • 2. OBJECTIVE
    • To examine how the firms make production decisions in competitive markets
  • 3. Three Characteristics of a Perfectly Competitive Market
    • There are many buyers and sellers in the market
    • The goods offered by the various sellers are largely the same
    • Firms can freely enter and exit the market
  • 4. DEFINITION
    • A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
  • 5. The Revenue of a Competitive Firm
    • Total revenue ( TR = P X Q )‏
    • Average revenue ( AR = TR / Q )‏
    • Marginal revenue ( MR = ∆TR / ∆Q )‏
  • 6. PRICE, AVERAGE REVENUE AND MARGINAL REVENUE
    • Since AR = TR / Q and P = TR / Q, then, AR = P
    • Since TR = P X Q, and P is fixed, then, when Q rises by 1 unit, TR rises by P. Therefore, MR = P
  • 7. PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM'S SUPPLY CURVE
    • The goal of a competitive firm is to maximize profit.
    • Profit = TR - TC
  • 8. Profit Maximization: A Numerical Example
  • 9. The Marginal-Cost Curve and the Firm's Supply Decision
    • Three features of a cost curves
    • Marginal-cost curve (MC) is upward sloping
    • Average-total-cost curve (ATC) is U-shaped, and
    • Marginal-cost curve crosses the average- total-curve at the minimum of average total cost
  • 10. Profit Maximization: Graphical Illustration COST AND REVENUE QUANTITY MC ATC P = AR = MR AVC P = MR 1 = MR 2 Q 2 Q MAX Q 1 0 MC 1 MC 2 The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue
  • 11. Three General Rules for Profit Maximization
    • If MR › MC, the firm should increase its output
    • If MC › MR, the firm should decrease its output
    • At the profit-maximizing level of output, MR = MC
  • 12. MARGINAL COST AS THE FIRM'S SUPPLY CURVE PRICE QUANTITY P 2 P 1 0 Q 1 Q 2 AVC ATC MC
  • 13. THE COMPETITIVE FIRM'S SHORT-RUN SUPPLY CURVE MC ATC AVC COSTS QUANTITY Firm's shuts down if P ‹ AVC Firm's short-run supply curve
  • 14. The Firm's Short-Run Decision to Shut Down
    • SHUTDOWN
    Refers to a short-run decision not to produce anything during a specific period of time because of current market conditions
  • 15. When Does the Firm Need to Shutdown
    • If TR ‹ VC
    • If TR / Q ‹ VC / Q
    • If P ‹ AVC for P = TR / Q and AVC = VC / Q
  • 16. THE COMPETITIVE FIRM'S LONG-RUN SUPPLY CURVE MC ATC COSTS QUANTITY 0 Firms exits if P ‹ ATC Firm's long-run supply curve
  • 17. The Firm's Long-Run Decision to Exit or Enter a Market
    • EXIT AND ENTER
    Refers to a long-run decision of the firm to leave and enter the market
  • 18. When Does The Firm Need to Exit and Enter the Market
    • Exit if TR ‹ TC
    • Exit if TR /Q ‹ TC /Q
    • Exit if P ‹ ATC, and
    • Enter if P › ATC
  • 19. References
    • Mankiw, Gregory N., 2007. Principles of Economics: Fourth Edition, Thomson Learning Asia, 5 Shenton Way #01-01 UIC Building, Singapore
    • http://en.wikipedia.org/wiki/Perfect_competition
    • http://faculty.oxy.edu/whitney/classes/ec250/notes/content/iv.htm

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