Firms in Competitive markets CK hapter 14
Firms in Competitive Markets Chapter 14
The Meaning of competition a perfectly competitive market has the following characteristics There are many buyers and sellers in the market The goods offered by the various sellers are largely the same Firms can freely enter or exit the market (which require inputs can freely flow among markets
The Meaning of Competition • A perfectly competitive market has the following characteristics: – There are many buyers and sellers in the market. – The goods offered by the various sellers are largely the same. – Firms can freely enter or exit the market (which require inputs can freely flow among markets)
The Meaning of competition as a result of its characteristics the perfectly competitive market has the ollowing outcomes The actions of any single buyer or seller in the market have a negligible impact on the market P orIce Each buyer and seller takes the market price as given o Buyers and sellers in competitive markets are said to be price takers Buyers and sellers must accept the price determined by the market
The Meaning of Competition • As a result of its characteristics, the perfectly competitive market has the following outcomes: – The actions of any single buyer or seller in the market have a negligible impact on the market price. – Each buyer and seller takes the market price as given. • Buyers and sellers in competitive markets are said to be price takers. – Buyers and sellers must accept the price determined by the market
Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold. TR=(PX Q) Total revenue is proportional to the amount of output Average revenue tells us how much revenue a firm receives for the typical unit sold o In perfect competition average revenue equals the price of the good
Revenue of a Competitive Firm • Total revenue for a firm is the selling price times the quantity sold. TR = (P X Q) • Total revenue is proportional to the amount of output. • Average revenue tells us how much revenue a firm receives for the typical unit sold. • In perfect competition, average revenue equals the price of the good
Revenue of a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold MR=△TR/AQ o For competitive firms, marginal revenue equals the price of the good
Revenue of a Competitive Firm • Marginal revenue is the change in total revenue from an additional unit sold. • MR =DTR/DQ • For competitive firms, marginal revenue equals the price of the good
Total, average, and marginal Revenue for a Competitive firm Quantity Price Total Revenue Average Revenue Marginal Revenue (Q)(P) (TREPXQ (ARETR/Q) (MR△TR/△Q s60060 600 s600 $1200 s600 s600 2345678 6 $1800 s600 s600 s600 924.00 s600 s600 S600 s30.00 S600 S600 s600 s3600 s600 s600 s6054200 s600 s600 s600 48 s600
Total, Average, and Marginal Revenue for a Competitive Firm Quantity (Q) Price (P) Total Revenue (TR=PxQ) Average Revenue (AR=TR/Q) Marginal Revenue (MR= ) 1 $6.00 $6.00 $6.00 2 $6.00 $12.00 $6.00 $6.00 3 $6.00 $18.00 $6.00 $6.00 4 $6.00 $24.00 $6.00 $6.00 5 $6.00 $30.00 $6.00 $6.00 6 $6.00 $36.00 $6.00 $6.00 7 $6.00 $42.00 $6.00 $6.00 8 $6.00 $48.00 $6.00 $6.00 DT R/ DQ
Profit maximization for the Competitive firm The goal of a competitive firm is to maximize profit e This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost
Profit Maximization for the Competitive Firm • The goal of a competitive firm is to maximize profit. • This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost
Profit maximization: A Numerical Example Price Quantity Total Revenue Total Cost Profit Marginal Revenue Marginal Cost P (TREPXQ) RTC)NMR:ATR/Q)MC△TC△Q s0.00 s3.00 -S300 s600 S600 s5.00 1.00 s600 200 s600 1200 s800 4.00 s600 S300 s600 3 1800 1200 s600 s600 94.0 s600 92400 17.00 S700 s600 S500 s605 s3000 92300 s7.00 s600 S6.00 s600 s36.00 s30050 s60s70 s60 7 s4200 s380094.06100 s800 s600 8 4800470010 S600590
Profit Maximization: A Numerical Example Price (P) Quantity (Q) Total Revenue (TR=PxQ) Total Cost (TC) Profit (TR-TC) Marginal Revenue (MR= ) Marginal Cost MC= 0 $0.00 $3.00 -$3.00 $6.00 1 $6.00 $5.00 $1.00 $6.00 $2.00 $6.00 2 $12.00 $8.00 $4.00 $6.00 $3.00 $6.00 3 $18.00 $12.00 $6.00 $6.00 $4.00 $6.00 4 $24.00 $17.00 $7.00 $6.00 $5.00 $6.00 5 $30.00 $23.00 $7.00 $6.00 $6.00 $6.00 6 $36.00 $30.00 $6.00 $6.00 $7.00 $6.00 7 $42.00 $38.00 $4.00 $6.00 $8.00 $6.00 8 $48.00 $47.00 $1.00 $6.00 $9.00 DT R/ DQ D T C / D Q
Profit maximization for the Competitive firm. ●●● Costs The firm maximizes and profitby producing Revenue the quantity at which marginal cost equals MC marginalrevenue MC 2““……… ATC P=MR1 PEARE MR AVC MCI 0 Q ZMAX Q2 Quantity
P=MR1 P = AR = MR MC 0 Quantity Costs and Revenue ATC AVC QMAX The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. MC1 Q1 MC2 Q2 Profit Maximization for the Competitive Firm
Profit maximization for the Competitive firm o Profit maximization occurs at the quantity where marginal revenue equals marginal cost When Mr>MC increase Q When Mr<Mc decrease Q When mr=Mc Profit is maximized
Profit Maximization for the Competitive Firm • Profit maximization occurs at the quantity where marginal revenue equals marginal cost. When MR > MC increase Q When MR < MC decrease Q When MR = MC Profit is maximized