Chapter 14: firms in competitive markets( level of difficulty 1 1/2)

In perfectly competitive markets since the price determined by the market is accepted, the people are considered to be price takers. Firms have the goal to maximize profit , and they maximize by creating the greatest difference between total revenue and total cost. Marginal revenue and marginal cost are to be equivalent. Decisions for the firms divide into two categories, shutdowns or exits. In the short run, shut downs are more convenient since sunk costs are not taken into consideration. (Sunk costs being those costs that have already been committed and cannot be recovered. Thus is efficient if the revenue the firm gets is less than the  variable cost of production. On the other hand in the long run and exit pays attention to short costs, where it is efficient if the revenue is less than the total cost. The complete opposite happens when the action is to be profitable, and total revenue exceeds total cost. Enter and exit methods are used to drive profit to zero. Have price equal minimum average total cost, and are horizontal at the pricing. Firms must make zero economic profit where price and ATC are driven to equality. In the long run equilibrium must have firms at efficient scale. Firms stay in business without a profit, and determine to recompensate time and money. In the short run if there is an increase in the demand, total revenue grows, and now profits exceed ATC! Marginal firms would exit the market if it were any lower.