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FSU ECO 2023 - Exam 3

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Exam 3 [Chapters 9,10,11]Chapter 9: Price Takers and the Competitive Process-A price taking firm will be:>Small relative to the market>In a market with many buyers>Sell an identical product>In a market with no barriers to exit or entry-A price taking firm can sell all its outputs at the market price but can’t price it any higher-Price taking firms maximize their profits based on a two-step process:>Decide whether to stay open or closed>>A firm will stay open if it can pay for all of the variable costs>>> When P>AVC or MR>AVC or TR>TVC>If they stay open, the firm must decide how much to produce>>A firm will continue to produce as long as marginal revenue is greater than marginal cost (MR>MC)-Profit is the reward that entrepreneurs or firms receive when they produce a good that consumer’s value more than the resources required for the good’s production-Losses are the penalty to entrepreneurs or firms for reducing the value of the resources used to create that goodChapter 10: Price Searcher Market with Low Entry Barriers-The characteristics of a competitive price-searcher market with low entry barriers (monopolistic competition) are:>There are many sellers>Low entry barriers>>Anybody can enter the market>They sell differentiated but similar products>>For example: Dove caters towards women, Irish springs towards men but in the end of the day they both sell soap-The firm will close if MR<AVC or TR<TVC-The firm will keep producing as long as MR>MC-Note: Since each firm produces a differentiated product, there is no market supply or demand curve. There is only a firm supply and demand curve-In a competitive price searcher market the firm has some control over price, thus they can raise prices so that they are greater than their average variable cost. But as they raise prices the quantity demanded is reduced-Short Run:>If profit exists new firms will enter and steal some profits, making the demand for your firms products decrease which will shift the demand curve left>If losses occur existing firms will have to leave because they cannot cover their average variable cost, thus the demand foryour firm’s products will increase and your demand curve will shift right-Long Run:>As firms enter and exit the industry , the firms demand curve shifts until zero economic profit exists>>At zero profit, there is no more entry or exit>>>Zero Economic Profit P=ATC-An entrepreneur is someone who makes decisions based upon uncertainty, discovery, and business judgment-Entrepreneurs play a vital role in economic progress by discovering new products and services that create wealth>Market forces provide incentives for entrepreneurs to try new ideas-The difference between price taker and price searcher markets:>Due to advertising expenses, price searcher products will be priced higher than prices taker products-Price Discrimination is the practice of selling the same good to two or more groups of people at different prices-The only firms that can price discriminate are the firms that>Have a downward sloping demand curve>Can prevent customers from re-trading the product>Can separate their customers into at least two groups>>Elastic>>Inelastic-Firms price discriminate to increase profits-Firms price discriminate by setting a relatively high price for those customers with inelastic demand and a relatively low price for those customers with elastic demandChapter 11: Price Searcher Markets with High Entry Barriers-A monopoly is a market structure characterized by a single seller of a well-defined product for which there are no good substitutes and high barriers to entry-An entry barrier is something that prevents you from operating a business in a particular industry. Some entry barriers are:>Economies of Scale>>When the fixed costs in an industry are large, bigger firms can generally achieve lower average total per unit costs than smaller ones>Government Licensing and other legal barriers to Entry>>Another firm may have a license or patent that precludes you from offering the same goods or services>Somebody else owns the vital resource such as oil or diamonds-Entry barriers are important for a monopoly because it creates market power-In a monopoly the firm will continue to produce as long as MR>MC-Monopolists are not guaranteed Short-Run or Long-Run profits because:>The demand curve could shift left>The cost curves could shift up-The characteristics of an oligopoly is interdependence among firms which leads to strategic behavior-An oligopoly firm is greatly concerned about what the other firms in the industry are doing thus each firm will base part of their decisions on what they think other firms are doing or will do(REMEMBER)>A perfectly competitive firm is not concerned about any other firm>A monopolist doesn’t have another firm to consider>A monopolistically competitive firm is only somewhat concerned about what other firms are doing because they are selling a differentiated product-The price and output decision under an oligopoly is that:>Sometimes oligopolies will act like perfectly competitive firms>Sometimes they will act as monopolist>Many times they switch between the two-Oligopolies will try to collude to keep prices artificially high-If firms jointly agreed to keep production low that would generally be good for all firms, but the incentive to cheat would be so great that the agreement would not last long-The defects of markets with high entry barriers(monopoly and oligopoly) are:>Output is higher>Price is higher>Some gains from trade are not realizedVariety is lower-Some of the ways to prevent industries with high entry barriers are:>Antitrust Policies>Policies/laws made to ensure competition is present>Reduce artificial barriers to trade such as tariffs, quotas and licensing requirements>Regulate price and output of firms operating in markets with high barriers to entry>Government produces the goods>>This often leads to inefficiency>>>Think of


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