ECON-200 Chapter Notes - Chapter 14: Marginal Revenue, Marginal Cost, Takers
Econ 200
Intro to Economics
Fall 2017
Firms in Competitive Markets
● Introduction
○ We will utilize our theory of the firm presented in Chapter 13 to reveal the
following:
■ How a firm in a competitive market will determine how much to produce.
■ The effects of changes in market demand in both the short run and the
long run in a competitive market.
● What is a Competitive Market
○ A competitive market typically has three characteristics.
■ “There are many buyers and many sellers in the market.”
● Implies that no entity in the market has any “market power.”
■ “The goods offered by the various sellers are largely the same.”
● Implies that a firm cannot raise its price above that of its
competitors without losing all its sales.
■ “Firms can freely enter or exit the market.”
● Implies that long run economic profits are zero in the industry.
■ Price takers: “… sellers in competitive markets must accept the price the
market determines and, therefore, are said to be price takers.”
○ Marginal Revenue in a Competitive Market
■ Total Revenue (TR)
● TR = P x Q
■ Marginal Revenue (MR)
● Definition: the change in the total revenue of a firm resulting from
a one unit increase in the number of goods sold.
● MR = P, for a firm in a competitive market.
● Profit Maximization And The Competitive Firm’s Supply Curve
○ Marginal-Cost Curve and the Firm’s Supply Decision
■ “If marginal revenue is greater than marginal cost, the firm should
increase its output.”
■ “At the profit-maximizing level of output, marginal revenue and marginal
cost are exactly equal.”
● The firm supply will be at the point where P = MC.
● See Figure 1 and Figure 2
○ Measuring Profit in Our Graph for the Competitive Firm
■ See Figure 5
● Profit = TR – TC
● Profit = (TR/Q – TC/Q) x Q
● Profit = (P – ATC) x Q
○ Why Do Competitive Firms Stay in Business If They Make Zero Profit?
Document Summary
We will utilize our theory of the firm presented in chapter 13 to reveal the following: How a firm in a competitive market will determine how much to produce. The effects of changes in market demand in both the short run and the. What is a competitive market long run in a competitive market. A competitive market typically has three characteristics. There are many buyers and many sellers in the market. Implies that no entity in the market has any market power. The goods offered by the various sellers are largely the same. Implies that a firm cannot raise its price above that of its competitors without losing all its sales. Firms can freely enter or exit the market. Implies that long run economic profits are zero in the industry. Price takers: sellers in competitive markets must accept the price the market determines and, therefore, are said to be price takers.
