Difficulty: 2/3 (Not enough numbers; math is easy but concepts are hard)
Review: 4/5 (I guess it's okay)
We return to the definition of the competitive market: goods offered are identical for all the firms and there are so many buyers and sellers there is no market power. Added to the definition is that firms can freely join and exit the market.
We define average revenue as total revenue over output and marginal revenue as the change in total revenue with one additional output. Average revenue equals the price of the good.
Firms maximize profit by creating and selling until the marginal cost is equal to marginal revenue.
Firms can shut down or exit the market if conditions are not suitable. To shut down is to temporarily not create anything (still pay fixed costs) while to exit is long term. A sunk cost is something committed that cannot be recovered, like lost money. You shut down if P < AVC and you exit if P < ATC. This means firms consider exiting before shutting down, since there is a sunk cost if shutting down only.
Profit here is measured by (price - average total cost) * quantity. In the long run, exit and entry stops when price and average total cost are equal. This takes place at the efficient scale since its at the lowest point on ATC curve. Even if economic profit is zero, accountable profit is positive so that's why some business stay in the market even if they just meet the minimum.
When demand increases, in the short run there is profit, but over time more firms are created and equilibrium is stored so the intersection is at the no profit point. But, sometimes long run supply curve slopes upward because of limited land, pickiness of new entrants, etc. so economic profit could still exist even in the long run.
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