Transcript Chapter_09_Micro_15ex

Micro Chapter 9
Price Takers and the
Competitive Process
2 Learning Goals
1) Determine when a firm will temporarily or
permanently go out of business
2) Explain the process of competition and
identify the effects on consumers and
producers
“It is competition that drives down costs
and prices, induces firms to produce the
goods consumers want, and spurs
innovation and the expansion of new
markets…”
President’s Council of Economic Advisors
Price Takers and Price
Searchers
Skim this section
Focus on “competition as a dynamic
process”
What are the
Characteristics of PriceTaker Markets?
A price taker must set price equal to
the market equilibrium price because:
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 the Price
Taker Maximize Profit?
The firm’s decision is a two-step
process:
(1) Decide to open or close
(2) If open, decide how much to produce
Class Activity: Why are some stores like
Wal-Mart open 24 hours while others like
Nuberri are not?
(1) Decide to open or close
Consider this scenario:
– Fixed costs
– Variable costs
– Total revenue
$20,000
$30,000
$40,000
2 Transmitter Questions Next
For the next two questions, discuss your
suggested answer with your neighbors
before answering
Q 9.1
Fixed costs
$20,000
Variable costs $30,000
Total revenue
$40,000
If the firm closes, how much is profit?
$20,000
b. $10,000
c. $0
d. -$20,000
a.
Q9.2
Fixed costs
$20,000
Variable costs $30,000
Total revenue
$40,000
If the firm stays open, how much is profit?
$20,000
b. $10,000
c. -$10,000
d. -$20,000
a.
So, the decision rule for (1) is as follows:
Close if the firm can’t pay variable costs
More specifically, close if:
(1) MR < AVC, or
(2) TR < TVC
(2) If open, decide how much to
produce
Continue to engage in an activity as long
as the expected marginal benefit is greater
than the expected marginal cost
Specifically, keep producing as long as
MR > MC
Class Activity: Economics is Everywhere
8.7
The Wall Street Journal tells of jet-setters who
are deserting South Beach in Miami because the
trendy clubs there have become less exclusive.
How exclusive should a club be? Each club
faces a profit-maximizing decision, just as firms
do. So do professional associations that award
honors to their members. If there is too little
exclusivity, existing members will feel that
belonging to the club is not worthwhile. Too
many awards, and previous recipients feel their
prize has been devalued. Each club or
association should continue to admit people or
give out awards until the marginal value to the
association or club of having one more member
or one more recipient of an award falls below the
cost to the club in lost membership or in
disgruntled prior winners of its awards.
I don’t want to pick on just the guys…
Q: How big should a pledge class be for a
sorority or fraternity at FSU? What are the
benefits if the class is smaller? What are
the benefits if the class is larger?
2 Transmitter Questions Next
Q9.3 When the marginal cost of a firm is
more than the market price of its product, the
firm should
1. expand output.
2. reduce output.
3. maintain output.
4. charge more than the market price.
Q9.4 If an amusement park that is highly profitable during the
summer months is unable to cover its variable costs during the
winter months, which of the following would be the best
alternative?
1.
2.
3.
4.
raise its prices during the winter months.
lower its prices during the summer months.
operate during the summer, but shut down during the
winter months.
operate during all months of the year as long as its profits
during the summer exceed its losses during the winter.
Shut down rules:
Close temporarily if you expect to cover
variable costs in the near future
Close permanently if you don’t expect to
cover variable costs in the near future
Video (viewer discretion advised): This is
scary!
Skip the following sections
The Firm’s Short-Run
Supply Curve
The Short-Run Market
Supply Curve
Price and Output in
Price-Taker Markets
Skip the previous sections
The Role of Profits and
Losses
Competition Promotes
Prosperity
Class Activity:
What does it mean to you when an
industry or market is described as
“competitive”?
Have you heard this before?
Another example:
Here are the main points I want you
to understand
1)
2)
3)
4)
Why economists like competition:
Costs are reduced
Prices are reduced
Firms become more efficient and have a
stronger incentive to innovate
Resources are moved from unproductive
areas to productive areas
Video:
Transmitter Question Next
Q9.5 The dynamic process of competition
1. is hindered by the self-interest of business
decision makers.
2. puts the profit motive of sellers to work for buyers.
3. conflicts with the interest of consumers when
businesses pursue profit rather than the public
interest.
4. will permit business decision makers to earn longrun economic profit unless they are regulated by
government.
2 Learning Goals
1) Determine when a firm will temporarily or
permanently go out of business
2) Explain the process of competition and
identify the effects on consumers and
producers