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FSU ECO 2023 - Chapter 9: Price Takers and the Competitive Process

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ECO2023Test 3Chapter 9: Price Takers and the Competitive Process• Marginal Revenue: The incremental change in total revenue derived from the sale of one additional unit of a productMarginal Revenue= Change∈Total RevenueChange∈Output• Shutdown: A temporary halt in the operation of a firm. Because the firm anticipates operating in the future, it does not sell its assets and go completely out of business. The firm’s variable cost is eliminated by the shutdown, but its fixed costs continue.• Going out of Business: The sale of a firm’s assets and its permanent exit from the market. By going out of business, a firm is able to avoid its fixed costs, which would continue during a shutdown. • A firm should continue to operate if it anticipates that a lower market price is only temporary as long as it can cover its variable cost.o May choose to produce at output level where P=MR=MC• A firm should shut down (temporarily suspend operations) when the market price drops below the firm’s average variable cost.• A firm should permanently go out of business when market conditions are not expected to change for the better.• Profits and Losses are signals to producers of what products consumers value and how they value them.o Profits: Consumers value the product moreo Losses: Consumers value the product less.o These signals influence producer’s decisions to pursue production or to use resources elsewhere.• Competition in the market makes producers operate efficiently and promotes the use of resources wisely in favor of buyers.• Why economists like competition:o Costs are reducedo Prices are reducedo Firms become more efficient and have a stronger incentive to innovate.o Resources are moved from unproductive areas to productive areas.Chapter 10: Price-Searcher Markets with Low Entry Barriers• Competitive Price-Searcher Market: A market in which the firms have a downward-sloping demand curve and entry into and exit from the market are relatively easy.• Monopolistic Competition: Another name for ‘price searcher markets with low entry barriers’ • Key characteristics of competitive price-searcher markets:o Many sellerso Low entry barrierso Firms have downward-sloping demand curveo Sell differentiated, but similar products Ex: ice cream, gas stations, fast food.• Firms have to work hard to sell you their product. The same decision rules apply:o Close if MR > AVC or if TR >TVCo Keep producing as long as MR > MC But now the firm has some control over price.In the Short-Run…• If positive profits exist, new firms will enter and “steal” some customers from existing firms.o Demand curve shifts left• If negative profits exist, some existing firms will exit and surviving firms will gain more customerso Demand curve shifts rightIn the Long-Run…• As firms exit and enter the industry, the firm demand curve shifts until zero profit exists. Price = Average Total Cost = 0 Profit*Since each firm produces a differentiated product, we don’t speak of a market supply or demand curve but only of a firm supply and demand curve. • Goods and Bads of Competitive Price-Searcher market structure:* A tradeoff exists:o Good: With more firms in the market, product variety is higher.o Bad: With more firms in the market, Average Total Cost is higher.o Good: With fewer firms in the market, Average Total Cost is lower.o Bad: Product variety is lower with fewer firms in the market.• Some economists argue that competitive price-searcher markets are inefficient because firms do not produce the output rate that would minimize their ATC.Evaluating these kinds of markets and economic progress:• 2 different interpretations:o Recall short-run dynamics: Positive profits, new firms enter, existing firms lose customers.o Recall long-run equilibrium: Zero profit, no entry or exit No entrepreneur will want to settle for this As market conditions begin to reach this point, the entrepreneur must get creative to keep positive profits. Innovation & Invention will keep markets away from long-run equilibrium Price Discrimination• Price Discrimination: A practice whereby a seller charge different prices for the same product or service • 3 necessary conditions that allow a firm to price discriminate:1. Firm has a downward sloping demand curve2. Must be able to separate customers into at least 2 groupsa. Groups must have different demand elasticities 3. Can prevent customers from re-trading the product• Firms price discriminate to increase profits and number of sales• Firms price discriminate by setting relatively high prices for customers with inelastic demand and lower prices for those with more elastic demand.Entrepreneurship • An entrepreneur is someone who makes decisions based upon uncertainty, discovery, and business judgment.o These decisions cannot be graphed or modeled. • Entrepreneurs play a vital, immeasurable role in economic progress by discovering new products and services that create wealth• Market forces provide incentives and signals for entrepreneurs. Chapter 11: Price-Searcher Markets with High Entry Barriers• An entry barrier is something that prevents you from opening a business in a particular industry.• 4 primary reasons why barriers can be high:1. Economies of Scale2. Government licensing and other legal barriers to entrya. Oldest and most prevalent form of protecting a business from competitors.b. Often, obtaining licenses are costly and majorly deterring for those attempting to enter an industry.3. Patentsa. Prevent competitors from using protected products and proceduresb. Generally lead to higher consumer pricesc. Encourage research and technological improvement 4. Control over an essential resourcea. Often insulates a firm from direct competitors • Entry barriers create market powero If no new firms can enter the market to steal customers and products, the existing firms behave differently. • Monopoly: A market structure characterized by a single seller of a well-defined product for which there are no good substitutes and by high barriers to the entry of any other firms into the market for that product.• A monopoly is most likely to emerge in a market when economies of scale are large relative to market demand (firm large from the beginning) • A true case of monopoly is unusual because no substitute product is an explicit requirement, and that’s very rarely the case.• In a monopoly, the firm decides the price and the


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