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In this chapter we examine the behavior of competitive firms, such as your local gas station. After completing this chapter, students will be able to learn what characteristics make a market competitive, examine how competitive firms decide how much output to produce, examine how competitive firms decide when to shut down production temporarily,. | Firms in Competitive Markets Chapter 14 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. 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. 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. Thus, each buyer and seller is a price taker. Example of Competitive Markets Eggs vs. Nike Sneakers. Pay attention to the difference between the two market structures. Which brand . | Firms in Competitive Markets Chapter 14 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. 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. 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. Thus, each buyer and seller is a price taker. Example of Competitive Markets Eggs vs. Nike Sneakers. Pay attention to the difference between the two market structures. Which brand names do you recognize? Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold. TR = (P X Q) Revenue of a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold. MR = TR/ Q Revenue of a Competitive Firm For competitive firms, marginal revenue equals the price of the good. Total, Average, and Marginal Revenue for a Competitive Firm 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 P = AR = MR P=MR1 MC Profit Maximization for the Competitive Firm. Quantity 0 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 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Profit .
