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Shifting cost curvesprice takers: the seller who must take the market price in order to sell their productagriculturalprice searcher: firms that choose the price they charge for their product, but the quantity they are able to sell is inversely related to pricenike, sony, Nintendocharacteristics of price taker marketthere are a large number of firms in the marketeach firm produces identical productsoutput is small relative to the total marketable to sell all output at the market pricethere are no barriers to entry or exitbarrier entry of economics: obstacles that limit the freedom of potential rivals to enter and compete in an industry or marketexcessive licensing & regulationsgraphing price taker marketsthe market forces of supply and demand determine priceprice takers have no control over this price, so the demand for the product of the firm is perfectly elasticmarginal revenue(MR): the change in TR derived from the scale of one additional unit of a productmarginal revenue=priceMaximizing profitsGraphically, firms should produce where the marginal cost curve intersects the marginal revenue curve.MC=MRProfits and lossesif MR=MC occurs above the ATC curve then the firm is making an economic profit.*d is perfectly elastic, so flat.TR=PxQTC= ATCxQProfit= total revenue-total costtotal costs =fixed costs+ variable closesif MR=MC occurs below the ATC the firm is making an economic loss!*d is perfectly elastic, so flat.TR=PxQTC=ATCxQRemaining open in the short runA firm making losses will remain open in the short run if:it can cover its variable costs nowexpects 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-run1.if firms are making an economic profit: new firms will enter and drive price down.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 price up.If markets close down, then that will drive demand up.Long run equilibriumLong run equilibrium will occur when all firms in the industry are making zero economic profit.Role of profits and lossesWhy economist love competition1. keeps costs and prices low.2. firms have the incentive to be efficient and innovative3. good forms stay, bad firms leave!Why do people hate Wal-mart?Walmart employs sweatshop labor from other countriesWe 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.Employees prob wouldn’t get payed more somewhere else, that’s why they work there.Walmart destroys the local small business communityIt saves people money so they can spend it elsewhere.Price takers vs price searchersIn long run equilibrium, both price takers and price searchers:1. have price equal to average total cost (ATC)2. make zero economic profitHowever….Price taker: P=MR=MCCompetitive price searchers P>MR=MCEconomics of business failureCompetition will drive failing firms out of business and free up the resources used by that firm for more productive use.Contestable marketsContestable markets are markets in which firms can enter and exit with minimal risk.Why riskless?Cheap to enterOr 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 conditions1. 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.EntrepreneurshipA person who introduces new products or improved technologies.Successful entrepreneurs will increase the value of resources.Entrepreneurship and economic growthCreative destruction: the replacement of old products and production methods by innovative new ones that consumers judge to be superior.This process generates economic growth and higher standards of livingPrice discriminationA practice whereby a seller charges different consumers different prices for the same product or service1. identify and separate at least two groups with different elasticities of demand.2. Prevent those who buy at the low price from reselling to those who buy at the high pricethis is done to maximize total revenue.Competitive price searcherCompetitive price searcher: a firm that1. has low barriers to entry2. faces a downward sloping demand curve(because they produce differentiated products)Differentiated products: products that are distinguished from similarproducts by characteristics like quality, design, and method of production.Ex: nike shoes vs other shoesBecause good substitutes are available, the demand curve faced by competitive price searchers is highly elastic.A decrease in price will increase the quantity sold.Price searcher graphIn order to sell a higher quantity a price searcher will have to lower price.Marginal revenue will always be less then price for a price searcher.*down sloping demand**Marginal revenue curve is always lower than demand curve*Maximizing profitsA price searcher maximizes profits by producing where Marginal Revenue=Marginal CostPrice searcher making profitsIf price > ATC, then firm makes an economic profit.If price < ATC, firm is making economic loss.*if firm is making losses, the ATC curve is ABOVE demand curve*Long run equilibriumWhen 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 discriminationA 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 demand2. prevent those who buy at the low price from reselling back to the inelastic consumer.Ex:movie theatre tickets (adults vs children)families with children do care about the prices (elastic) so that’s why kid’s movie tickets are less than adultsBundlingBundling: the sale of tow or more goods and services together.Good for consumersTying: the act of making


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FSU ECO 2023 - Exam 3

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