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 process Price Takers Vs Price Searchers o Price Takers Price is SET i ii Maximize profits by selling as much output as they can iii Also known as purely competitive markets o Price searchers Determines their own price i 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 markets 4 Characteristics when a price taker is at equilibrium 1 Each firm is small relative to the market 2 Each firm sells an identical product 3 There are many buyers in the market 4 No barriers to entry exit exist How does Price takers maximize profit Decision Rules 1 Close a firm when you cant pay for variable cost if MR AVC 2 If open decide how much to produce Keep producing as long as MR MC 3 Close temporarily if you expect to cover variable costs in the near future 4 Close permanently if you don t expect to cover variable costs in the near future Competition promotes Prosperity Why economists like competition 1 Costs are reduced 2 Prices are reduced 3 Firms become more efficient and have a stronger incentive to innovate 4 Resources are moved from unproductive areas to productive areas Chapter 10 Price Searcher Markets with Low Entry Barriers Competitive 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 price same decision rules apply Output in the Short Run o If profit exists new firms will enter and steal some of your customers o If losses exist some existing firms will exit and you will gain customers Demand curve will shift left Demand curve will shift right o As firms exit and enter the industry the firm demand curve shifts until zero profits Output in the long run exists o At Zero profit no more entry or exist Evaluating 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 ideas Price Discrimination The practice of selling the same good to two or more groups of people at different prices A 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 barriers Entry 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 away SR and LR profit can be positive negative or zero Characteristics of an oligopoly 1 A small of rival firms 2 Interdependence among the sellers which leads to strategic behavior key characteristic 3 Substantial economies of scale 4 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 barriers Generally 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 lower Policy Alternatives when entry barriers are high To fix the industry 1 Antitrust Policy Sherman Act Clayton Act FTC etc 2 Reduce artificial barriers 3 Regulate price and output 4 Government production
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