Journaling of Chapter 14: Firms in Competitive Markets

     Chapter 14 describes the behavior of competitive firms. Competitive firms are markets where the buyers and sellers are price takers because they hold no market power. Competitive firm’s average revenue and marginal revenue are equal to the price of the good because total revenue is proportional to the amount of output sold. All firms’ goals are to maximize profit. In order to do this, firms compare marginal revenue with marginal cost. Profit maximization can be determined with three rules. If marginal revenue exceeds marginal costs, output should be increased. If a marginal cost exceeds marginal revenue, output should be decreased. When they’re equal, it’s called profit-maximizing level of output. In these cases, the marginal cost curve serves as the competitive firms supply curve because the marginal cost curve determines how much the firm will supply at any price. Also, the competitive firm’s short run supply curve is the portion of its marginal-cost curve that lies above the average-variable-cost curve. The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above the average-total-cost curve. In the long run, a firm will exit the market if the revenue it would get from producing is less than its total costs. The short run market supply curve is upward sloping. The long run market supply curve is horizontal, meaning it is perfectly elastic.

     I would give this chapter a difficulty rating of 2 out of 3. I didn’t understand most of the graphs. There was just so many! However, the tables really helped with my comprehension. Overall, I learned that marginal analysis plays a huge part in supply decisions.