Chapter 9Price Takers: The sellers who must take the market price in order to sell their product- They do not get to choose their price...THEY TAKE IT- Nobody will buy it if it is NOT at the market price- There is very little difference between the products in a price taker market, so whatever it costs to produce it they have to sell it at that price...nobody will buy it if you charge more because they can just buy it somewhere else- Ex. Wheat Farmers: There is very little difference from one farmer’s wheat compared to another farmer’s wheatCharacteristics of Price Taker Markets1. There are a large number of firms in the market- What makes a price taker is the fact that there are a lot of people trying to sell the SAME product- There is a lot of competition - Price Taker market is “perfectly competitive”2. Each firm produces identical products- Whatever product they are producing, there are NO differences between them3. Their output is small relative to the total market- This does NOT mean they aren’t producing a lot, they could be producing thousands- This means that the thousands they are producing is small in comparison tothe millions being produced in total- No one firm is dominating the market...it is PERFECTLY COMPETITIVE because no one firm is dominating.4. They are able to sell all of their output at the market price- They can sell as much as they want as long as it is at the market price5. There are no barriers to entry or barriers to exit of firms in this market- Barrier to entry: obstacles that limit the freedom of potential rivals to enter and compete in the industry or market- Ex of a Barrier to Entry: Excessive licensing and regulations- There is a good and bad side to regulations- Bad side: can limit competition therefore preventing a perfectly competitive marketGraphing Price Taker Markets- The market forces of supply and demand determine price- Price takers have NO CONTROL over this price, so the demand for the product of the firm is perfectly elastic- Price Takers will be unable to sell any goods at a higher price- Price Takers have no incentive to lower the price- This is because they can sell as much as they want at the market price- If you can sell all you want at $6, why would you sell it for $5.99?Marginal Revenue in a Price Taker Market- Marginal Revenue: (MR) The change in Total Revenue derived from the sale of one additional unit of a product- For a Price Taker: Marginal Revenue = Price- MR=P- This Relationship only exists in a price taker marketMaximizing Profits in a price taker firm- To maximize profits, a firm should increase output until marginal revenue is equal to marginal cost- PROFIT MAXIMIZING RULE: *****MR=MC********- Not beyond that point- Note: A firm should produce when MR>MC- NEVER produce when MC>MR- Graphically, firms should produce where the marginal cost curve intersects the marginal revenue curveProfits and Losses- If the ATC curve is below where MR=MC then the firm is making an economic profit- If the ATC curve is above where MR=MC, then the firm is making an economic lossRemaining Open in the Short Run- A firm that is 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 costs - Seasonal Businesses: White Water Rafting is closed in winter and open in Fall and Summer which makes enough money to cover the costs, otherwise it will close down.Entry and Exit in the Long Run- If firms are making an economic profit:- New firms will enter the market and drive the price down - “If these people are making money, and if they are making more money there than anywhere else, I want to open a firm like that too”- The demand will go down because they are competing with these other firms that are entering the market, the price will drop until the firm is making zero economic profit.- If firms are making an economic loss: - Existing firms will leave the market and drive price up- With less competition, price will rise- “There is less money being made here than if I could use my money for other things”Long Run Equilibrium- Long Run Equilibrium will occur when all firms in the industry are making zero economic profitThe Role of Profits and Losses- Why economists love competition:- It inspires people- Focuses people’s minds- The seller must please the customer or they will shut down- If you are a firm producing economic profit, you created value- It also:- Keeps costs and prices low- Firms have the incentive to be efficient and innovative- Good firms stay, bad firms leaveWhat is Good About Walmart?- Walmart creates voluntary exchanges- People tend to save a lot of money, so they can spend their savings elsewhereWhy Do People Hate Walmart?- “Walmart employs sweatshop labors from other countries”- Nirvana Fallacy??- “It does not provide adequate compensation to their domestic employees”- These workers are choosing the best of their options by working there. If Walmart closed then the workers would work somewhere worse. They chose the best of their alternatives by working there.- “It destroys the local small business community”- But the test of a theory is its ability to predict- Study finds that Walmart has little impact on small businesses- Saving money at Walmart leaves spending money for other stores thus the other stores flourish too- Seen VS UnseenChapter 10Price Searchers: Firms that choose the price they charge for their product are Price Searchers; however, the quantity they are able to sell is inversely related to price- If they want to charge more they will sell less....if they charge less they willsell more- There is a difference in the products, they are unique - Ex. There is difference between Nike shoes and other shoes, so they can choose their own price for their unique productCompetitive Price Searcher- Has low barriers of entry- It is still competitive- Often called “perfectly competitive” because:- Of the unique products- Monopolistic competition - Faces a downward sloping demand curve- Because they produce differentiated products- Price has an inverse relationship with quantity soldDifferentiated Products- Differentiated products are products that are distinguished from similar products by characteristics like quality, design, and method of production- EX. Nike shoes and other shoes- EX. Miller Beer and Natural LightDemand Curve- Because good substitutes are available, the demand curve faced by competitive
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