![]() ![]() To answer this question we must keep in mind that profit equals total revenue minus total cost, and that total cost includes all the opportunity costs of the firm. Why do competitive firms stay in business if they make zero profit? (price = marginal cost in competitive markets M free entry and exit forces price to equal average total cost price equal marginal and average total cost marginal and average total cost equals each other = efficient scale). The long-run equilibrium of a competitive market with free entry an exit must have firms operating at their efficient scale. (total revenue is P × Q ) An operating firm has zero profit if and only if the price of the good equals the average total cost of producing that good. Average revenue tells us how much revenue a firm for the typical unit sold. The average revenue is total revenue divided by the quantity sold (amount of output). The revenue of a competitive firm Ī firm in a competitive market tries to maximize profit, which equals total revenue minus total cost. Each buyer and seller takes the market price as given, meaning, he must accept the price the market determines and therefore, buyers and sellers are said to be price takers. The goods offered by the various sellers are largely the sameĪs a result of these conditions, the actions of any single buyer or seller in the market have a negligible impact on the market price. ![]() There are many buyers and many sellers in the market.What is a competitive Market? The meaning of competition Ī competitive market, sometimes called a perfectly competitive market has two characteristics: 2.5 Why the long-run supply curve might slope upward.2.4 A shift in demand in the short run and long run.2.3 Why do competitive firms stay in business if they make zero profit?.2.2 The long run: market supply with entry and exit.2.1 The short run: market supply with a fixed number of firms.2 The supply curve in a competitive market.1.7 Measuring profit in our graph for the competitive firm.1.6 The firm’s long run decision to exit or enter a market.1.4 The firm’s short-run decision to shut down.1.3 The marginal cost curve and the firm’s supply decision.1.2 Profit maximization and the competitive firm’s supply curve.1 What is a competitive Market? The meaning of competition. ![]()
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