Chapter 14

Chapter 14 dealt with competitive markets. In a perfectly competitive market, as is assumed throughout the chapter, there are so many buyers and seller that no single person or firm has the power to affect the supply or demand. They're referred to as price takers. All of the goods produced are also identical. With the goal of any firm to try and maximize profit, we learned in the last chapter that the point at which you want to operate is when the marginal cost curve meets the average total cost curve which is also the lowest point on the average total cost curve. If the marginal cost is higher than the ATC, then production should be decreased and vice versa. There are times when the AVC is higher than the price and that means that for each good produced and sold, you are actually losing money, so the more goods you make the more money you lose. That is when a firm should shut down production, at least temporarily. A firm could be operating between AVC and ATC in the short run because they are still making money by selling goods and they expect to be making money in the future. In the long run, only profit is acceptable so if a firm is not operating at ATC or higher then it needs to shut down and exit the market.