#AP Microeconomics: Market Entry & Exit - Your Night-Before Guide

Hey! Let's get you prepped for the exam with a super focused review of market entry and exit. We'll break down the key concepts, look at some graphs, and make sure you're feeling confident. Let's do this! 💪

#Perfectly Competitive Markets: The Basics

Key Concept

Many Sellers: Lots of firms are competing.
- Low Barriers to Entry/Exit: Easy for firms to start or stop production.
- Price Takers: Firms accept the market price; they don't set it.

# Entering vs. Exiting

Entering: A firm starts producing and selling goods (quantity > 0).
Exiting: A firm stops producing, but might still exist as a company (quantity = 0).

#The Shut-Down Rule: Short-Run Decisions

# When to Shut Down

In the short run, firms have fixed costs they must pay regardless of production.
Firms compare Total Revenue (TR) to Total Variable Cost (TVC) or Price (P) to Average Variable Cost (AVC).

Key Concept

Shutdown Rule: If P < AVC, the firm should shut down and only pay fixed costs.

Memory Aid

Think: "If you can't cover your variable costs, don't produce! Just pay the fixed costs."

#Visualizing the Shutdown Point

Below, the firm should shut down because the price ( $5) is less than the AVC ($ 7) at the profit-maximizing quantity (10).

Shutdown Rule Graph

Caption: The firm will shut down at a quantity of 10 because the price ( $5) is less than the average variable cost ($ 7).

#Example

TR = $50 (10 units x$ 5/unit)
TC = $120 (10 units x$ 12/unit)
Loss if operating = $70 ($ 50 - $120)
Fixed Cost (FC)= $50 (AFC of$ 5 x 10 units). Remember, AFC is the vertical distance between ATC and AVC.
Decision: Shut down because $50 (fixed cost) <$ 70 (loss if operating).

Quick Fact

Producer Surplus (PS) = TR - TVC. If P < AVC, PS is negative, which is another way to see why firms shut down.

#Long-Run Entry and Exit

# Long-Run Decisions

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Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market

Paul Scott