Unit 14: Firms in Competitive Markets
A price-taking firm's whole decision compressed into one rule, and the two exits it can take when the numbers turn against it.
5 topics · 16 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
The Characteristics of a Perfectly Competitive Market
- How it worksHow do many small sellers, an identical product, and free entry and exit combine to make every firm a price taker?
- Common mistakeWhy isn't a firm in a competitive market powerless just because it's small — it's the structure of the whole market that matters?
- Going furtherWhat happens to a firm's pricing power if it's the only seller among thousands offering an identical, easily substituted product?
Your turn1 of 2
A single wheat farmer sells a small fraction of the total wheat traded in a huge national market. No matter how much wheat she decides to sell, the market price stays the same. Why can't she change the market price?Profit Maximization Where Marginal Revenue Equals Marginal Cost
- How it worksHow does a competitive firm maximize profit by producing right up to where price, its marginal revenue, equals marginal cost?
- Worked exampleFind the profit-maximizing quantity for a firm facing a 10 dollar price when marginal cost equals 2 plus 0.5 times quantity.
- Common mistakeWhy doesn't a firm maximize profit by producing wherever average cost happens to be lowest?
Your turn1 of 2
Find the profit-maximizing quantity for a firm facing a 17 dollar price when marginal cost equals 3 plus 0.766 times quantity.The Marginal Cost Curve as the Firm's Supply Curve
- How it worksHow does the portion of the marginal cost curve above average variable cost become the firm's short-run supply curve?
- Common mistakeWhy doesn't the entire marginal cost curve count as the firm's supply curve?
- Ties togetherHow does adding up every firm's marginal-cost-based supply curve build the market supply curve from the supply and demand unit?
Your turn1 of 2
Find the quantity a firm supplies at a price of 20 dollars when marginal cost is MC = 0.395 times Q.The Shutdown Decision vs the Exit Decision
- How it worksHow does a firm compare price to average variable cost for the shutdown decision but to average total cost for the exit decision?
- Worked exampleFind whether a firm should shut down in the short run if price is 8 dollars, average variable cost is 6 dollars, and average total cost is 10 dollars.
- Common mistakeWhy doesn't a firm losing money always mean it should shut down that same day?
- Going furtherWhat happens to a firm's shutdown decision if fixed costs suddenly double while variable costs stay the same?
Your turn1 of 2
Price is 12 dollars, average variable cost is 14 dollars, and average total cost is 24 dollars. By how many dollars per unit does price exceed average variable cost?Long-Run Equilibrium and Zero Economic Profit
- How it worksHow does free entry drive economic profit down to zero as new firms pour into a profitable competitive market?
- Common mistakeWhy doesn't zero economic profit mean a firm is failing or about to go out of business?
- Ties togetherHow does Adam Smith's invisible hand explain why free entry drives economic profit down to zero?
Your turn1 of 2
A firm sells 120 units at a price of 16 dollars, with average total cost of 17 dollars. What is the firm's economic profit?