Exam 3 ch 9 13 04 17 2014 Shifting cost curves price takers the seller who must take the market price in order to sell their product agricultural price searcher firms that choose the price they charge for their product but the quantity they are able to sell is inversely related to price nike sony Nintendo there are a large number of firms in the market characteristics of price taker market each firm produces identical products output is small relative to the total market able to sell all output at the market price there are no barriers to entry or exit barrier entry of economics obstacles that limit the freedom of potential rivals to enter and compete in an industry or market excessive licensing regulations the market forces of supply and demand determine price graphing price taker markets price takers have no control over this price so the demand for the product of the firm is perfectly elastic marginal revenue MR the change in TR derived from the scale of one additional unit of a product marginal revenue price Maximizing profits Graphically firms should produce where the marginal cost curve intersects the marginal revenue curve MC MR Profits and losses if MR MC occurs above the ATC curve then the firm is making an economic profit d is perfectly elastic so flat TR PxQ TC ATCxQ Profit total revenue total cost total costs fixed costs variable closes if MR MC occurs below the ATC the firm is making an economic loss d is perfectly elastic so flat TR PxQ TC ATCxQ Remaining open in the short run A firm making losses will remain open in the short run if it can cover its variable costs now expects price to be high enough in the future to cover all of its costs Otherwise it will shut down Entry and exit in the long run 1 if firms are making an economic profit new firms will enter and drive price Demand for things goes down if other companies come into the market and make the same thing you make 2 if firms are making an economic loss firms will leave the market nad drive down price up If markets close down then that will drive demand up Long run equilibrium Long run equilibrium will occur when all firms in the industry are making zero economic profit Role of profits and losses Why economist love competition 1 keeps costs and prices low 2 firms have the incentive to be efficient and innovative 3 good forms stay bad firms leave Why do people hate Wal mart Walmart employs sweatshop labor from other countries o We know that sweat shops help those countries because it s the best opportunity they have Walmart doesn t provide adequate compensation to their domestic employees why they work there o Employees prob wouldn t get payed more somewhere else that s Walmart destroys the local small business community o It saves people money so they can spend it elsewhere Price takers vs price searchers In long run equilibrium both price takers and price searchers 1 have price equal to average total cost ATC 2 make zero economic profit However Price taker P MR MC Competitive price searchers P MR MC Economics of business failure Competition will drive failing firms out of business and free up the resources used by that firm for more productive use Contestable markets Contestable markets are markets in which firms can enter and exit with minimal risk o Why riskless o Cheap to enter o Or it might be expensive but the resources of this market can be re directed towards something else Airline routes if a new route opens and is unsuccessful then the plane pilot and other resources can be reused for another more successful route Two important conditions 1 prices above the level necessary to achieve zero economic profits will not be maintained a In the long run profits will be zero 2 costs of production will be kept to a minimum 3 There is no need for a lot of competition because it is riskless to enter the market Its the threat of entry to keep the firm making sure their costs and prices are low Entrepreneurship A person who introduces new products or improved technologies Successful entrepreneurs will increase the value of resources Entrepreneurship and economic growth Creative destruction the replacement of old products and production methods by innovative new ones that consumers judge to be superior o This process generates economic growth and higher standards of living Price discrimination the same product or service demand A practice whereby a seller charges different consumers different prices for 1 identify and separate at least two groups with different elasticities of 2 Prevent those who buy at the low price from reselling to those who buy at the high price this is done to maximize total revenue Price searcher markets with low entry barriers Competitive price searcher Competitive price searcher a firm that 1 has low barriers to entry 04 17 2014 2 faces a downward sloping demand curve because they produce differentiated products Differentiated products products that are distinguished from similar products by characteristics like quality design and method of production Ex nike shoes vs other shoes Because good substitutes are available the demand curve faced by competitive price searchers is highly elastic o A decrease in price will increase the quantity sold In order to sell a higher quantity a price searcher will will always be less then price for a Price searcher graph have to lower price Marginal revenue price searcher down sloping demand curve Marginal revenue curve is always lower than demand Maximizing profits A price searcher maximizes profits by producing where Marginal Revenue Marginal Cost Price searcher making profits o If price ATC then firm makes an economic profit o If price ATC firm is making economic loss if firm is making losses the ATC curve is ABOVE demand curve Long run equilibrium When firms in a price searcher market make an economic profit loss new firms will enter exit and drive price down up demand curve does down which makes price lower than before In the long run firms will make zero economic profit Price discrimination A practice whereby a seller charges different consumers different prices for the same product or service 1 identify and separate at least two groups with different elasticity of 2 prevent those who buy at the low price from reselling back to the demand inelastic consumer Ex movie theatre tickets adults vs children o families with children do care about the prices elastic so that s why kid s movie tickets are less than adults Bundling the sale of tow or more
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