STUDY GUIDE for EXAM THREE ECO2023 04 2011 Martha Evans Instructor Price Takers a Note This study guide is intended to be used as a tool to help you prepare for the test It is an outline representing the topics that have been emphasized in the book and the notes for each section chapter It is NOT an exact representation of the way that questions will be phrased on the test CHAPTER 9 PRICE TAKERS and the COMPETITIVE PROCESS 1 What are the characteristics of Price Takers and their markets Price takers produce identical homogenous products E g wheat corn soybeans Many firms numerous suppliers in market Small firms No entry or exit barriers firms may freely enter and exit the market Price take markets are also known as purely competitive markets Market forces supply demand determine price The price takers have no control over the price that they may charge Therefore the firms demand curve is perfectly elastic Horizontal at the price determined in the market c What is profit maximizing rule for a Price Taker price and quantity In the short run expand output until marginal revenue marginal cost Remember in a price taker market marginal revenue market price What does a Price Taker s demand curve look like and why b d Be able to explain why any point other than the profit maximizing quantity would not be efficient 1 When the price is greater than the marginal cost production of the unit adds more to revenues than costs In order to maximize profits the firm will expand output until MC P When the price is less than the marginal cost the unit adds more to costs than revenues A profit maximizing firm will not produce in this range it will reduce output until MP P 2 From a table be able to calculate Marginal Cost Marginal Revenue and Profit Find the profit maximizing price and quantity from a table Marginal revenue change in total revenue change in output Marginal cost change in total cost change in quantity Profit Total revenue total cost Profit is maximized at the greatest difference between total revenue and total cost Be able to identify the area of profit and or loss for a Price Taker from a 3 graph if given various prices Total revenue total cost approach Profits occur where total revenue is greater than total cost and are maximize the difference is largest Losses occur where total cost is greater than total where revenue long run Explain why there is a difference variable will earn 4 What level of profit can a Price Taker earn in the short run In the In the short run the firm maximizes profits when it produces at P MC and costs are covered In the long run if price exceeds average total cost firms an economic profit Economic profit includes the entry of new firms and the expansion in scale of existing firms Economic profit is equal to zero in the because of competition long run 2 Know how to identify the area of profit maximization if looking at total a firm s demand and cost curves 5 Profit maximized where Price Marginal Revenue Marginal Cost 6 If a firm is experiencing losses under what conditions and why should it continue to operate A firm experiencing losses but covering a average variable costs will operate in the short run b shut down temporarily Whenever price falls below average variable cost go out of business In the long run when price is less than c average total cost 7 What is the Supply curve for the firm For the Market Given resource prices the firms Marginal cost curve above AVC is the firm s curve The short run market supply curve is the sum of the firms supple supply MC curves increasing cost industry 8 What is meant by the following terms Industry where per unit cost rises as market output is expanded Results increase in industry output generally leads to stronger demand and higher the inputs Long run market supply curve in this industry is upward sloping Industry where per unit costs remain unchanged as market output is a because an prices for b expanded Occurs constant cost industry 3 decreasing cost industry demand c either inputs leads These d when the industry s demand for resource inputs is small relative to total Long run market supply curve is horizontal Industry where per unit costs decline as market output expands Implies economies of scale exist in the industry or that an increase in demand for to lower input prices Long run market supply curve is downward sloping industries are rare Increasing cost industry Is elasticity of market supply more elastic in the short run or long run 9 Why More elastic in the long run because firms can alter plant size and other fixed factors of production Most firms are which of the above How does it differ from the Price Taker s market CHAPTER 10 COMPETITIVE PRICE SEARCHER MARKETS with LOW ENTRY BARRIERS 1 Describe the characteristics of a Competitive Price Searcher market a They can alter the price and face strong competitive pressure There are low entry barriers Competition exists from existing firms and potential rivals Also known as monopolistic competition b How are the Price Searcher s products different from the Price Taker s They produce products that differ in design dependability location ease of purchase etc Whereas price taker products do not differ Rival firms produce similar products therefore each firm has a highly elastic demand curve c Examples different types of ice cream companies Ben Jerry s vs Breyers d What does a Price Searcher s demand curve look like and why Downward sloping demand curve because of product differentiation e What is profit maximizing rule for a Price Searcher price and quantity Expand output as long as marginal revenue exceeds marginal cost Price will be lowered and output expanded until MR MC The price charged will be greater Be able to give examples of Price Searcher types of firms 4 than its marginal cost f Beyond the ideal q the price reduction required to sell additional units reduce the firms profit There are more costs than revenues For any level less than q a price reduction and resulting sales expansion will to total revenues than to total costs g Relatively elastic because of the availability of substitutes Be able to explain why any point other than the profit maximizing quantity would not be efficient will output add more Are Price Searchers demand curves relatively elastic or inelastic Why 2 What are some ways in which Competitive Price Searchers differentiate In design dependability quality style service location packaging and their products many other ways Can
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