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

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* It helps if you read the chapter focusing on these key points for a more in depth understanding*Chapter 9: Price Takers and the Competitive processPrice Takers Vs. Price Searcherso Price Takers i. Price is SET ii. Maximize profits by selling as much output as they caniii. Also known as purely competitive marketso Price searchers i. Determines their own price ii. maximize profit choose a price and how much to produce. Ex Nike Know this!!!!Competition as a Dynamic process- Rivalry between parties to deliver a better deal to buyers in terms of quality, price, and product information.Characteristics of price taker markets4 Characteristics when a price taker is at equilibrium1) Each firm is small relative to the market2) Each firm sells an identical product3) There are many buyers in the market4) No barriers to entry/exit existHow does Price takers maximize profit?Decision Rules1) Close a firm when you cant pay for variable cost if MR<AVC2) If open, decide how much to produce. Keep producing as long as MR>MC3) Close temporarily if you expect to cover variable costs in the near future4) Close permanently if you don’t expect to cover variable costs in the near future.Competition promotes ProsperityWhy economists like competition:1) Costs are reduced2) Prices are reduced3) Firms become more efficient and have a stronger incentive to innovate4) Resources are moved from unproductive areas to productive areasChapter 10: Price Searcher Markets with Low Entry BarriersCompetitive Price Searcher Markets Also called monopolistic competition because they have characteristics similar to other types of markets:o Many sellers (have to search for price and output to maximize their profits}o Low entry Barriers (ensure its competitive)o Sell Differentiated but similar products (ex. A hamburger from BK isn’t identical to one from Wendy’s}o Has control over pricesame decision rules applyOutput in the Short Run:o If profit exists, new firms will enter and “steal some of your customers- Demand curve will shift lefto If losses exist, some existing firms will exit and you will gain customers- Demand curve will shift rightOutput in the long run:o As firms exit and enter the industry, the firm demand curve shifts until zero profits existso At Zero profit – no more entry or existEvaluating competitive price-searcher markets- Complex decision-making and the entrepreneur• A tradeoff exists – – with fewer firms the ATC is lower (good) but product variety is also lower (bad)with more firms the ATC is higher (bad) but variety is also higher (good)– ATC is higher mainly due to brand promotion– Alternative analysis: positive profits, new firms enter, new and existing firms attract customers, both demand curves shift right• Recall the long-run equilibrium: zero profit, no entry or exit-No entrepreneur will want to settle for this-As the market conditions begin to reach this point, the entrepreneur must then get creative to keep positive profits-Innovation and invention will keep markets away from long-run equilibrium -Driven by the profit motive, entrepreneurs continually drive economic progress • An entrepreneur is someone who makes decisions based upon uncertainty, discovery, and business judgment. Entrepreneurship and the economic progress• Entrepreneurs play a vital role in economic progress by discovering new products and services that create wealth• Market forces provide incentives (and signals) for entrepreneurs to try new ideasPrice Discrimination• The practice of selling the same good to two or more groups of people at different pricesA firm can price discriminate if:• (1) has a downward-sloping demand curve • (2) can separate its customers into at least two groups• (3) can prevent customers from re-trading the product* Firms price discriminate to increase the # of sales and profits; they do this by setting a high price for those customers with inelastic demand and a low price for those customers with elastic demand*Chapter 11: Price Searcher markets with high entry barriersEntry barriers are sometimes high because economies of scale, government licensing, patents, and control over essential resource.Entry barrier: is something that prevents you from opening a business in a particular industry. Preventions:(1) Sometimes you just need to start as a really big firm(2) Another firm may have a license or patent that precludes you(3) Somebody else owns the vital resource-Entry barriers create market power if no new firms enter the market to steal customers and profits, the existing firms behave differently.Need to know!!!!!!• The monopolist will reduce price and expand output as long as MR > MC.• The monopolist will raise price and reduce output whenever MR < MC.• The firm will set price according to market demand (i.e. willingness to pay)• In the SR the firm can earn positive economic profit• LR profits will not be pushed to zero because of entry barriers, and no new firm can enter and take profit awaySR and LR profit can be positive, negative, or zeroCharacteristics of an oligopoly1) A small # of rival firms2) Interdependence among the sellers which leads to strategic behavior{key characteristic3) Substantial economies of scale4} High entry barriers to the market**An oligopoly firm is greatly concerned about what other firms in the industry are doing. Each firm will base it’s own decision on what they think other firms are doing or will do.Price and output under oligopoly- Selling products at an higher price with low output will make firms better off- Firms will not have an incentive to keep output low because other firms will increase production, lower price, and steal customers- If firms agreed to keep production low it would be good for all firms, but the incentive to cheat would be high.Defects of Markets with high entry barriersGenerally, the outcomes of monopoly and oligopoly are not as desirable as with perfect competition• Output is lower• Price is higher• Some gains from trade are not realized• Variety is lowerPolicy Alternatives when entry barriers are highTo fix the industry:1) Antitrust Policy (Sherman Act, Clayton Act, FTC, etc)2) Reduce artificial barriers3) Regulate price and output4) Government


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