Chapter 9 1 Marginal Revenue The incremental change in total revenue derived from the sale of one additional unit of a product Shutdown A temporary halt in the operation of a firm Because the firm anticipates operating in the future it doe not sell its assets an go out of business The firm s variable cost is eliminated by the shutdown but its fixed costs continue Going out of business The sale of a firm s assets and its permanent exit from the market By going out of business a firm is able to avoid its fixed costs which would continue during a shutdown When should a firm Continue to operate A firm experiencing losses but covering average variable costs will operate in the short run Shut down temporarily Whenever price falls below average variable cost Go out of business In the long run when price is less than average total cost 2 How are profits and losses signals to producers How do those signals influence choices Profit is a reward that business owners will earn if they produce a good that consumers value more as measured by their willingness to pay than the alternative goods that could have been produced with those same resources as measured by the cost of bidding the resources away from their alternative uses In contrast losses area penalty imposed on businesses that reduce the value produced from resources Losses are a signal that the other goods that could have been produced with those same resources were of greater value than what is currently being produced What market outcomes are usually associated with the competitive process Competition puts pressure on producers to operate efficiently and use resources wisely Each competing firm will have a strong incentive to produce its products as economically as possible Pursuit of profit will encourage each firm to minimize its cost of production to use the set of resources least valued in other uses to produce the desired output Firms that fail to keep costs low will be driven from the market Chapter 10 Competitive price searcher market A market in which the firms have a downward sloping demand curve and entry into and exit from the market are relatively easy Another name for price searcher markets with low entry barriers Competitive price searcher market or monopolistic competition 3 key characteristics of competitive price searcher markets 1 Many Sellers 2 Low entry barriers 3 Sell differentiated but similar products In the short run what will happen to an existing firm if positive profits exist New firms will enter and steal some of your customers Your demand curve will shift left Draw a graph showing a firm with positive economic profit Be sure to include ATC Demand MR and MC In the short run what will happen to an existing firm if negative profits exist Some existing firms will exit and you will gain customers Your demand curve will shift right What is the profit level of firms in the long run As firms exit and enter the industry the firm demand curve shifts until zero profit exists At zero profit no more entry or exit Draw a graph showing a firm in the long run Be sure to include ATC Demand MR and MC 2 What is the good outcome with more firms in the market What is the bad outcome with more firms the ATC is higher bad but variety is also higher good What is the good outcome with fewer firms in the market What is the bad outcome with fewer firms the ATC is lower good but product variety is also lower bad ATC is higher mainly due to brand promotion 3 Price Discrimination A practice whereby a seller charges different consumers different prices for the same product or service What are the three necessary conditions that allow a firm to price discriminate Any firm that 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 Draw two graphs that illustrate price discrimination 4 Think of an entrepreneur or entrepreneurial firm that is not discussed in the book nor used as an example in class How has that individual or firm created wealth An entrepreneur is someone who makes decisions based upon uncertainty discovery and business judgment These decisions cannot be graphed or modeled Fred Smith founder of FedEx developed his business plan as a class project while studying at Yale University his professor gave him a C because he thought the idea was infeasible Chapter 11 1 The four primary reasons why entry barriers can be high are 1 Economies of scale some markets average total costs fall over the full range of output larger incumbent firms always have lower costs and it makes it hard for new firms to enter the market and compete wit the low cost firm 2 Government Licensing legal barriers to entry the license require potential firms to buy those permits 3 Patents patent gives the founder of design monopoly temporarily 4 Control over essential resources if a firm has control over resource for industry it can block others entry to market for example ALCO controlled bauzite supplies prevented firms from making aluminimum 2 Monopoly A market structure characterized by 1 a single seller of a well defined product for which there are no good substitutes and 2 high barriers to the entry of any other firms into the market for that product How does the monopolist decide what price to charge Like other price searchers the monopolist will expand its output until marginal revenue equals marginal cost This profit maximizing output rate can be sold at the price indicated on the firm s demand curve Can a monopolist earn short run profits Short run losses Yes profits and losses Can a monopolist earn long run positive profits Why or why not Yes positive negative or zero 3 Oligopoly A market situation in which a small number of sellers constitutes the entire industry It is competition among the few The characteristics of an oligopoly market are 1 Small number of rival firms 2 Interdependence among the sellers because each is large relative to the size of the market 3 Substantial economies of scale 4 High entry barriers to the market Provide two examples of firms in an oligopoly market 1 Airlines 2 Gas 4 Collusion Agreement among firms to avoid various competitive practices particularly price reductions It may involve either formal agreements or merely tacit recognition that competitive practices will be self defeating in the long run Tacit collusion is difficult to detect In the US antitrust laws prohibit collusion and conspiracies to restrain trade Cartel An
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