Microeconomics-Ch. 14: Firms in Competitive Markets
the ability of a firm to influence the market price of the good it sells.
Perfectly competitive market
-Many buyers and sellers (no one person or firm can effect price) -Goods are similar to identical (seen as perfect substitutes; perfectly elastic) -Firms can freely enter and exit the market -Firms are "price takers" (market determines the price)
Total revenue divided by the quantity sold. (for firms in a PC market, AR=price of the good)
change in total revenue from an additional unit sold. (for firms in a PC market, MR=AR=P)
a firm will maximize profit by producing the quantity at which marginal cost is equal to marginal revenue.
rules for profit maximization
-if MR>MC, firm should increase its output -if MC>MR, firm should decrease its output -At the profit-maximizing level of output, MR and MC are exactly equal.
PC firm's supply curve
in a PC firm, the supply curve is the same as the MC curve because the MC curve determines how much a firm is willing to supply at a given cost.