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5 terms

Competitive Market Nature

- free entry/exit = infinite number of firms

- Homogenous goods = no product differentiation

- Seller is a $$ taker

- Firm can choose optimal output given cost structure

- Homogenous goods = no product differentiation

- Seller is a $$ taker

- Firm can choose optimal output given cost structure

Firm I's profit maximizing output decision

- TR = P x Q

- AR = TR/q = P

PRICE = AR = MR

-----> demand curve is a horizontal line

- AR = TR/q = P

PRICE = AR = MR

-----> demand curve is a horizontal line

Profit maximizing and supply curve

Profit = TR - TC

MR = demand curve = AR = P

MC = how much supply at any price and is RISING

if MC > MR, output fall

if MC < MR, output rise

MR = demand curve = AR = P

MC = how much supply at any price and is RISING

if MC > MR, output fall

if MC < MR, output rise

SR Shut down decision

Shut down if TR < VC

Shut down if TR/q < VC/q = P < AVC

No variable costs if not producing

Shut down if TR/q < VC/q = P < AVC

No variable costs if not producing

LR Shut down decision

Exit if TR < TC

Exit if TR/q < TC/q = P < AC

Enter if P > AC

Total profit = (P-ATC) x Q

LR, Price = Minimum of AC

Exit if TR/q < TC/q = P < AC

Enter if P > AC

Total profit = (P-ATC) x Q

LR, Price = Minimum of AC