Chapter 9 Price 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 wheat Characteristics of Price Taker Markets 1 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 them 3 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 to the 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 price 5 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 market Graphing 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 market Maximizing 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 curve Profits 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 loss Remaining 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 profit The 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 Firms have the incentive to be efficient and innovative It also Keeps costs and prices low Good firms stay bad firms leave What is Good About Walmart Walmart creates voluntary exchanges People tend to save a lot of money so they can spend their savings elsewhere Why 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 Unseen Chapter 10 Price 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 will sell 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 product Competitive 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 sold Differentiated 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 Light Demand Curve Because good substitutes are available the demand curve faced by competitive price searchers is highly elastic Ex You can shop at other book stores A decrease in price will increase quantity sold Price Searcher Graph In order to sell a higher quantity a price searcher will have
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