Firms in Competitive Markets, Exams of Marketing

Download Firms in Competitive Markets and more Exams Marketing in PDF only on Docsity! Firms in Competitive Markets WHAT IS A COMPETITIVE MARKET? •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. •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. •A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker. •Buyers and sellers must accept the price determined by the market. The 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. •Average revenue is total revenue divided by the quantity sold. •In perfect competition, average revenue equals the price of the good. Average Revenue = Total revenue Quantity Price Quantity Quantity Price = × = •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. 1 Table 1 Total, Average, and Marginal Revenue for a Competitive Firm PROFIT MAXIMIZATION AND THE COMPETITIVE FIRM’S SUPPLY CURVE •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. Table 2 Profit Maximization: A Numerical Example 2 •A firm will enter the industry if such an action would be profitable. •Enter if TR > TC •Enter if TR/Q > TC/Q •Enter if P > ATC THE SUPPLY CURVE IN A COMPETITIVE MARKET Firm enters if P > ATC Firm ’supply curve s long-run Costs 0 ATC Quantity Firm exits if P < ATC MC = long-run S •The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost. Firm ’ssupply curve Costs 0 ATC Quantity MC •Short-Run Supply Curve•The portion of its marginal cost curve that lies above average variable cost. 5 •Long-Run Supply Curve•The marginal cost curve above the minimum point of its average total cost curve. (a) A Firm with Profits Profit ATC P MC ATC MR =P = AR Price Quantity Q 0 (profit-maximizing quantity) (b) A Firm with Losses Loss ATC P = MR P = AR MC ATC Price Quantity 0 Q (loss-minimizing quantity) 6 •Market supply equals the sum of the quantities supplied by the individual firms in the market. The Short Run: Market Supply with a Fixed Number of Firms •For any given price, each firm supplies a quantity of output so that its marginal cost equals price. •The market supply curve reflects the individual firms’ marginal cost curves. $2.00 1.00 Supply Price (b) Market MC (a) Individual Firm Price $2.00 1.00 Quantity (firm) Quantity (market) 200,000 100,000 0100 200 0 The Long Run: Market Supply with Entry and Exit •Firms will enter or exit the market until profit is driven to zero. •In the long run, price equals the minimum of average total cost. •The long-run market supply curve is horizontal at this price. ATC MC Supply P = minimum ATC Price Price (a) Firm s Zero-Profit Condition ’ (b) Market Supply Quantity (market) Quantity (firm) 0 0 •At the end of the process of entry and exit, firms that remain must be making zero economic profit. 7