Here is a first draft of the study guide. I have not included anything from the last two chapters. I will add that over the weekend.
FIRMS IN COMPETITIVE MARKETS
You should understand:
KEY POINTS:
I. What Is a Competitive Market?
A. The Meaning of Competition
B. The Revenue of a Competitive Firm
1. Total revenue from the sale of output is equal to price times quantity.
- Definition of Marginal Revenue: the change in total revenue from an additional unit sold.
3. The profit-maximizing quantity can also be found by comparing marginal revenue and marginal cost.
a. As long as marginal revenue exceeds marginal cost, increasing output will raise profit.
- If marginal revenue is less than marginal cost, the firm can increase profit by decreasing output.
- Profit-maximization occurs where marginal revenue is equal to marginal cost.
a. If marginal revenue is greater than the marginal cost, the firm can increase its profit by increasing output.
b. If marginal cost is greater than marginal revenue, the firm can increase its profit by decreasing output.
c. At the profit-maximizing level of output, marginal revenue is equal to marginal cost.
1. In some circumstances, a firm will decide to shut down and produce zero output.
2. There is a difference between a temporary shutdown of a firm and an exit from the market.
a. A shutdown refers to the short-run decision not to produce anything during a specified period of time because of current market conditions.
b. Exit refers to a long-run decision to leave the market.
c. One important difference is that, when a firm shuts down temporarily, it still must pay fixed costs.
3. If a firm shuts down, it will earn no revenue and will have only fixed costs (no variable costs).
4. Therefore, a firm will shut down if the revenue that it would get from producing is less than its variable costs of production:
Shut down if TR < VC.
5. Since TR = P * Q and VC = AVC * Q, we can rewrite this condition as:
Shut down if P < AVC. (Below the Shutdown Point)
D. The Firm’s Long-Run Decision to Exit or Enter a Market
1. If a firm exits the market, it will earn no revenue, but it will have no costs as well.
2. Therefore, a firm will exit if the revenue that it would earn from producing is less than its total costs:
Exit if TR < TC.
3. Since TR = P * Q and TC = ATC * Q, we can rewrite this condition as:
Exit if P < ATC. (Below 0-Profit Point)
4. A firm will enter an industry when there is profit potential, so this must mean that a firm will enter if revenues will exceed costs:
Enter if P > ATC.
Monopoly
KEY POINTS:
Be sure you know what a monopoly is and why they can remain a monopoly. What are the barriers to entry and what are some real-world examples? What is a natural monopoly? Be able to compare the monopoly situation to perfect competition: price, demand, marginal cost, marginal revenue, welfare, and etc. How should we regulate monopolies? Know the graphs!