Chapter 14

Chapter 14 examines firms and their decision-making processes in perfectly competitive markets. The important conditions to remember when looking at firms in perfectly competitive markets are that individual buyers and sellers have a negligible impact on the market, and that the goods offered  by various sellers are largely the same. This means that largely, no single buyer or seller has the power to control market prices, so they are referred to as price takers. This is important because it helps understand that because price is fixed, when Q rises by 1 unit, the total revenue rises by a fixed amount of dollars, or in other words, for competitive firms, marginal revenue equals the price of the good. It was also interesting to note that rational people think at the margin, and in terms of maximizing profit, so they will only produce goods where the marginal revenue is greater than or equal to the marginal cost. To understand this, you need to know that a firm is under-producing when its marginal cost curve is below marginal revenue and that a firm is over-producing when the marginal cost curve is above marginal revenue. The ideal profit-maximizing quantity comes where marginal cost equals marginal revenue. In essence, because the marginal cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal cost curve is also the competitive firm's supply curve. Overall, this chapter was relatively straightforward, and I understood it pretty well. I'd rate it a 2/3 in terms of difficulty.