CH_10-Micro - Full Length Text - Part: 5 Micro Only Text -...

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To Accompany “Economics: Private and Public Choice 11th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: James Gwartney, David Macpherson, & Charles Skipton Full Length Text Micro Only Text Part: Part: Chapter: Chapter: Next page Copyright ©2006 Thomson Business and Economics. All rights reserved. 5 22 3 10
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Firms in competitive price-searcher markets with low entry barriers face a downward sloping demand curve. Firms are free to set price, but face strong competitive pressure. Competition exists from existing firms and potential rivals. An alternative term for such markets is monopolistic competition .
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Price-searchers produce differentiated products – products that differ in design, dependability, location, ease of purchase, etc. Rival firms produce similar products (good substitutes) and therefore each firm confronts a highly elastic demand curve .
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. A profit-maximizing price searcher will expand output as long as marginal revenue exceeds marginal cost . Price will be lowered and output expanded until MR = MC . The price charged by a price searcher will be greater than its marginal cost .
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. d Price Quantity/time P 2 P 1 MR q 1 q 2 Increase in Total Revenue Reduction in Total Revenue • Consider the market for a product with initial price P 1 & output q 1 . Total revenue ( TR ) = P 1 x q 1 . • With a downward sloping demand curve, price reductions that increase sales will exert two conflicting influences on TR . • As the price falls from P 1 to P 2 , output increases from q 1 to q 2 . What effect does this have on TR ? • First, TR will rise because of an increase in the number of units sold ( q 2 - q 1 ) x P 2 . • However, TR will decline by [( P 1 - P 2 ) x q 1 ] as q 1 units once sold at the higher price ( P 1 ) are now sold at the lower price ( P 2 ). • Depending on the size of the respective shaded regions, total revenue may increase or decrease.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Price d MR MC ATC Quantity/time q P C Economic Profits • A price searcher maximizes profits by producing where MR = MC , at output level q … and charges a price P along the demand curve for that output level. • At q the average total cost is C . • Because the price is greater than the average total cost per unit ( P > C ) the firm is making economic profits equal to the area ( [ P - C ] x q ) • What impact will economic profits have if this is a typical firm?
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This note was uploaded on 03/20/2008 for the course ACC210 AND acc210 and taught by Professor Ernstberger during the Spring '08 term at N.C. State.

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CH_10-Micro - Full Length Text - Part: 5 Micro Only Text -...

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