1. Define competitive market
A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
- There are many buyers and sellers in the market.
- The goods offered by the various sellers are largely the same
Therefore the actions of any single buyer or seller in the market have a negligible impact on the market price.


2. Explain the relationship between MR, AR and Price
Marginal Revenue: change in total revenue from the sale of each additional unit of output
Average Revenue: total revenue divided by the amount of output. Tells us how much revenue a firm receives for the typical unit sold.
For competitive firms, marginal revenue equals the price of the good.

• therefore, AR equals the price in all firms, and MR equals the price in all competitive firms

3. What is the relationship between Marginal Cost and the firms Supply? Why and explain.

• With the MC, the quantity of output that maximizes profit can be found
• MC crosses average total cost curve at minimum
• this allows MC to intersect marginal revenue
• therefore the point of highest profit maximizing output is where MC = MR
• this way, the marginal costs are sufficiently covered

4. What is the shut-down decision in the short-run?
When therevenue does not exceed the average variable costs, the firm should shut down. However, if the revenue pays part of the variable costs, the firm should continue operating at a loss.
5. Describe how you measure profits on the graph.

• profit= TR - TC
• since MR = price, the ATC curve must be below MR to produce profits
• the area between the MC MR intersection point and the ATC point at that specific quantity indicate the profit

6. Describe how you measure losses on the graph

• if ATC is over MR, firm experiences losses
• losses are also calculated by area where MC intersects MR and ATC point where quantity is produced

7. What is the different between short-run and long-run?

8. Why are you at the break-even in the long-run?

- The prices increase and decrease, so they eventually even out, thus operate at break-even

9. When do firms exit the industry and what effect does that have on the firm and the market?

- Firms exit when there is a SR loss
- Supply decreases, market price increases & loses will eventually disappear

10. When do firms enter the industry and what effect does that have on the firm and the market?
-Firms enter if P>ATC
-Its the exact opposite as conditions for firms to exit
-supply increases, price falls and profits of other firms gradually disappear