The Firms and the Competitive Market

PERFECTLY COMPETITIVE MARKET Prepared by: Richard L. Toledo

Three Characteristics of a Perfectly Competitive Market ,[object Object],[object Object],[object Object]

The Revenue of a Competitive Firm ,[object Object],[object Object],[object Object]

PRICE, AVERAGE REVENUE AND MARGINAL REVENUE ,[object Object],[object Object]

PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM'S SUPPLY CURVE ,[object Object],[object Object]

Profit Maximization: A Numerical Example

The Marginal-Cost Curve and the Firm's Supply Decision ,[object Object],[object Object],[object Object],[object Object]

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

Three General Rules for Profit Maximization ,[object Object],[object Object],[object Object]

MARGINAL COST AS THE FIRM'S SUPPLY CURVE PRICE QUANTITY P 2 P 1 0 Q 1 Q 2 AVC ATC MC

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

The Firm's Short-Run Decision to Shut Down ,[object Object],Refers to a short-run decision not to produce anything during a specific period of time because of current market conditions

When Does the Firm Need to Shutdown ,[object Object],[object Object],[object Object]

THE COMPETITIVE FIRM'S LONG-RUN SUPPLY CURVE MC ATC COSTS QUANTITY 0 Firms exits if P ‹ ATC Firm's long-run supply curve

The Firm's Long-Run Decision to Exit or Enter a Market ,[object Object],Refers to a long-run decision of the firm to leave and enter the market

When Does The Firm Need to Exit and Enter the Market ,[object Object],[object Object],[object Object],[object Object]

References ,[object Object],[object Object],[object Object]

The Firms and the Competitive Market

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The Firms and the Competitive Market