Competitive Markets

 What is meant by a competitive firm?

o A competitive firm or a perfectly competitive market is one where all products are the same
and there are many sellers.
o The barrier to enter and exit the market is relatively low.
o The prices are dictated by the market.
 Explain the difference between a firm’s revenue and its profit. Which do firms maximize?
o Revenue: what is earned: R = P x Q
o Profit = revenue - costs
o Firms aim to maximize profits, which happens when MgP = MgC
o MgP = ∆ TP / ∆ TQ
o MgC = ∆ TC / ∆ TQ
 Under what conditions will a firm shut down temporarily? Explain.
o A firm shuts down if its total revenue is lesser than its variable costs: TR < VC
o Price < Average Variable Cost (the price the good receives has to be greater than the
average cost to produce it).
 Under what conditions will a firm exit a market? Explain.
o A firm will exit if its total revenue is lesser than the total cost: TR < TC
o P < ATC (a firm will exit when the average total cost is greater than the price of a good).
o A firm will ENTER if P > ATC.
 Does a firm’s price equal marginal cost in the short run, in the long run, or both? Explain.
o Both
o A firm should increase output as long as MgR > MgC