Transcript Chapter 9 - micro

Chapter 9
Price Takers and the Competitive
Process
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Overview
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The difference between a price taker and
a price searcher
The characteristics of price takers
Marginal revenue
The profit maximizing rule
Profits and losses
Long-Run equilibrium
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Price Takers
Price Takers: The sellers who must take
the market price in order to sell their
product
Ex. Wheat farmers, cattle ranchers
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Price Searchers
Price Searchers: firms that choose the
price they charge for their product, but
the quantity they are able to sell is
inversely related to price
Ex. Nike, Sony, Nintendo
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Characteristics of Price Taker
Markets
1. There are a large number of firms in the
market
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Characteristics of Price Taker
Markets
2. Each firm produces identical products
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Characteristics of Price Taker
Markets
3. Their output is small relative to the total
market
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Characteristics of Price Taker
Markets
4. They are able to sell all of their output at
the market price
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Characteristics of Price Taker
Markets
5. There are no barriers to entry or exit of
firms in the market
Barriers to Entry: Obstacles that limit the
freedom of potential rivals to enter and
compete in an industry or market
Ex. Excessive licensing
and regulations
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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
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Graphing Price Taker Markets
Price takers will be unable to sell any goods
at a higher price
Price takers have no incentive to lower price
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Marginal Revenue
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 (MR) = Price (P)
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Maximizing Profits
To maximize profits, a firm should increase output
until marginal revenue is equal to marginal cost.
Profit maximizing rule: MR = MC
*Note:
 A firm should produce when MR > MC
 A firm should never produce when MC > MR
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Maximizing Profits
Graphically, firms should produce where the
marginal cost curve intersects the
marginal revenue curve.
MR = MC
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Profits and Losses
1. If MR = MC occurs above the ATC curve
then the firm is making an economic profit
2. If MR = MC occurs below the ATC curve
then the firm is making an economic loss
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Remaining Open in the Short-Run
A firm making losses will remain open in the
short run if:
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It can cover its variable costs now
Expects price to be high enough in the
future to cover all of its costs
Otherwise, it will shut down.
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Entry and Exit in the Long-Run
1.
2.
If firms are making an economic profit:
New firms will enter and drive price
down
If firms are making an economic loss:
Firms will leave the market and drive
price up
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Long-run Equilibrium
Long-run equilibrium will occur when all
firms in the industry are making zero
economic profit
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The Role of Profits and Losses
Why economists love competition:
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Keeps costs and prices low
Firms have the incentive to be efficient
and innovative
Good firms stay, bad firms leave!
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Why economists love Walmart!
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Review
1. Know the difference between a price taker and
a price searcher.
2. Know the characteristics of a price taker
3. Know what marginal revenue is and how to
maximize profits
4. Be able to graphically analyze what quantity a
firm should produce, whether they are making
profits and losses, and whether or not they
should remain open in the short run
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Review
5. Know when firms will enter and exit the
market and how long-run equilibrium is
maintained.
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