Competitive Market
Full info
Everyone knows what they are trading and at what price
No info asymmetries (one party has more or better than the other)
Price takers
Competitive markets have so much competition that no one has the ability to affect market price. Thus all price-takers
If a buyer or seller has the ability to noticeably affect market prices, that person/firm has a market (and it's not a competitive market)
The only seller of food on a plan can charge a very high price, knowing that some people would be hungry enough to pay it.
The only buyer of food at a market at the end of the day could offer a very low price, knowing that some sellers would be willing to sell.
Participation in a competitive market places very specific constraints on a firm's ability to max profits.
Standardized goods
Goods and services have the same things and they are interchangable
In real life, goods are differentiated by qaulity, brand, or things that appeal to different tastes.
Comoodities under certain defnied things are consider standardized goods.
Free Entry and exit
Free entry and exit is not an essential condition for a competitive market, but when it does not hold, there are incentive to collude breaking the price-taking requirement
Not all markets it is as easy to entry
Revenues in a perfectly competitive market
In a perfectly competitive market, producers are able to sell as much as they want without affecting the market price.
Total revenue = Price * Quantity
Average Revenue = Total Revenue/Total Quantity
Marginal Revenue = deltaTR/deltaQ
Price does not changes
Total revenue is the price times quantity produced
Average Revenue is the total revenue divided by the quantity
Marginal revenue is the revenue generatedby selling an additional unit of a good
Notice that Price = Marginal Revenue = Average Revenue
Profits and production decisions
Firms seek to max profits
In a competive market, the only choice that a pric-taking firm can make to affect profits is the quantity of outpout to produce.
The profit-max quantity corresponds to the quantity at twhich marginal revenue is equal to the marginal cost.
Profit max occurs where MR = MC for a perfectly competitive firm.
Increase production as long as MR>MC, as total profit increases as another unit is produced.
Deciding when to operate
Producing the quantity where MR = MC may not always be to the firm's advantage
When a firm shuts down production, it avoiding incurring variable costs
Fixed costs remain and are sunk in the short-run
Because fixed costs are sunk, they are irrelevant in deciding whether to shut down in the short run.
The short decision to produce depends on variable costs, not fixed costs
Shut down if P < min(AVC)
The long run decision to produce depends on total cost, since all costs are variable in the long run
Long run supply
The key difference between short run and long run is that firms are able to enter and exit the market in the long run
The process of market entry and exit causes firms in the long run in a perfetly comptitive market:
TO earn 0 economic profits in the long run
Accountingprofits are positive in the long run)
Firms operate at an efficient scale
Supply is perfectly elastic
If positive economic profits exist:
P>ATC
New firms enter to gain profits
The market supply curve shifts outward until P = ATC
Economic profits go to zero for all firms
If economic profits are negative
P< ATC
Some firms exit the market
The market spply curve shifts inward until P = ATC
Economic profts go to zero for all firms
Efficient Scale: Quantity that minimizes average total cost
Firm's optimal production : P = MR = MC
MC intersects the average total cost curve at its lowest point : MC = min (ATC)
In the long run, economic profits are 0: P = ATC
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