Chapter 14: Firms in Competitive Markets

In Chapter 14, the costs and total revenue discussed in the previous chapter are applied on firms in competitive markets in order to maximize profits. For the market to be defined as competitive, there should be many buyers/sellers who are price takers, the goods are largely the same, and firms can enter or exit the market. A good example the book used was the Smith Family Dairy Farm and their production of milk. For the firms to maximize their profits, the marginal revenue and  the marginal cost should be exactly equal. If the marginal revenue is greater than the cost, the firm should keep on producing more but if the marginal revenue is less than the cost, they should decrease production. Also, the marginal revenue is the price of the good. It is also crucial to know that the marginal cost curve is the supply curve for the competitive market firms. In addition, the chapter discussed how to determine when a firm should exit or shut down their production in terms of price and the average variable cost (AVC). If the price is less than the AVC, then the firm should shut down. A sunk cost is the cost that has already been committed and cannot be recovered, such as the cost of land (a fixed cost). Overall, I understood the general concept of it but I found the charts to be rather confusing. I would rate this chapter a 2 since I really understood the first half of the chapter but the second confused quite a bit.