Transcript Chapter 10 - micro (new window)

Chapter 10
Price Searcher Markets with Low
Entry Barriers
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Overview
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How a price searcher is different from a
price taker.
Analyze the price searcher graph
Long run equilibrium in a price searcher
market
Contestable markets
Entrepreneurship
Price discrimination
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Competitive Price Searcher
Competitive Price Searcher: A firm that
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Has low barriers to entry
Faces a downward sloping demand curve
(because they produce differentiated
products)
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Competitive Price Searcher
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Competitive Price Searcher
Differentiated Products: Products that are
distinguished from similar products by
characteristics like quality, design, and
method of production
Ex. Nike Shoes vs. other shoes
Ex. Miller Beer vs. Natural Light
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Competitive Price Searcher
Because good substitutes are available, the
demand curve faced by competitive price
searchers is highly elastic
An decrease in price will increase the
quantity sold.
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The Price Searcher Graph
In order to sell a higher quantity, a price
searcher will have to lower price.
Marginal Revenue will always be less then
price for a price searcher
MR < P
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Maximizing profits
A price searcher maximizes profits by
producing where MR=MC.
1.
2.
If price > ATC, then firm makes an
economic profit
If price < ATC, then firm makes an
economic loss
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Long-run equilibrium
When firms in a price searcher market make
an economic profit (loss), new firms will
enter (exit) and drive price down (up).
In the Long-run, firms will make zero
economic profit.
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Economics of Business Failure
Competition will drive failing firms out of
business and free up the resources used
by that firm for more productive use.
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Price Takers vs. Price Searchers
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2.
In Long-run equilibrium, both price takers and
price searchers:
Have price equal to average total cost (ATC)
Make zero economic profit
However,
price taker: P = MR = MC
competitive price searcher: P > MR = MC
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Contestable Markets
Contestable markets are markets in which
firms can enter and exit with minimal risk
Ex. an airline route
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Contestable Markets
A contestable market has 2 important
conditions
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Prices above the level necessary to
achieve zero economic profits will not be
maintained
The costs of production will be kept to a
minimum
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Entrepreneurship
An Entrepreneur is a person who introduces
new products or improved technologies.
Successful entrepreneurs will increase the
value of resources
Ex. Henry Ford
Ex. Ray Kroc
Ex. Bill Gates
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Entrepreneurship: Who Knew?
Ken Olson, chairman/founder of Digital Equipment Corp.,
1977: "There is no reason anyone would want a
computer in their home."
Fred Smith’s (FedEx) Yale University Senior Project Grade
Remark: "The concept is interesting and well-formed,
but in order to earn better than a 'C,' the idea must be
feasible."
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#2 Be Entrepreneurial
Who would have thought….
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Entrepreneurship
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Entrepreneurship and Economic
Growth
Creative Destruction: The replacement of old
products and production methods by innovative
new ones that consumers judge to be superior.
This process generates economic growth and
higher standards of living
Think of life today compared to life 100, 50, or
even 20 years ago!
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Entrepreneurship and Economic
Growth
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Our medicine
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Our Entertainment
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Price Discrimination
A practice whereby a seller charges different
consumers different prices for the same
product or service.
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Price Discrimination
Effective use of price discrimination requires
2 things:
1. Identify and separate at least two groups
with different elasticities of demand
2. Prevent those who buy at the low price
from reselling to those who buy at the
high price.
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Price Discrimination
Examples of price discrimination:
Ex. Movie theatre tickets (adult vs. children)
Ex. Airline tickets (Saturday night stay)
Ex. Books (paperback vs. hardback)
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Bundling
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Bundling: the sale of two or more goods
and services together.
Ex. extra value meal
Tying: the act of making the purchase of
one good conditional on the purchase of a
second good
Ex. hospital room
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Review
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Understand the concept of a price
searcher and differentiated products.
Be able to analyze the price searcher
graph.
Understand the concept of long-run
equilibrium (comparing price searchers
and price takers).
Understand the concept of contestable
markets.
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Review
5. Understand the concept of creative
destruction and how entrepreneurship
leads to economic growth.
6. Understand the idea and process of price
discrimination and bundling.
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