Chapter 14 Journal

Chapter 14 elaborates about competitive firms in the market place. Due to no single buyer or seller influencing the market price, they are price takers, and its revenue is proportional to the amount of output it produces. The price of the good in this market equals both the firm's average revenue and its marginal revenue. To maximize profit, the firm chooses a quantity of output such that marginal revenue equals marginal cost. This makes the firm's marginal cost curve equal to its supply curve. In the short run, the firm will choose to shut down temporarily if the firm cannot recover its fixes costs and if the price of the good is less than the average variable cost. In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than the average total cost. In a market with free entry and exits, profits are zero in the long run. In this equilibrium, all firms produce at the efficient scale and the number of firms adjusts to satisfy the quantity demanded at this price. Changes in demand have different effects in time horizon. In the short run, an increase in demand raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses. But if firms can freely enter and exit the market, then in the long run, the amount of firms adjusts to drive the market back to the zero-profit equilibrium. Since firms can enter and exit more easily in the long run than the short run, the long-run supply curve is typically more elastic than the short-run supply curve. On a scale of 1-3, I would rate this chapter a difficulty rating of 2. It was a bit overwhelming when all of the terms are used and connected to each other.