09_Producer3-Price Searchers_

09_Producer3-Price Searchers_ - Firms: Price Searchers...

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1 Firms: Price Searchers (“Monopolistic” Competition) (Revenue for Price Searchers & Production) (Section 9) I. Definitions Competitive price-searcher markets Competitive price-searcher market - A market where the firm faces a downward sloped demand curve and entry & exit from market is relatively easy Price searchers produce differentiated products Often referred to as monopolistic competition
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2 II. How a price-searcher decides what to charge A. General When a price searcher reduces price in order to be able to sell more it has two contradictory forces on total revenue Ex : Graph:
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3 What is the profit maximizing decision? Graph economic profit for a price searcher: At what quantity does the above firm produce? What price does the firm charge? Where is the economic profit?
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4 B. A numerical example of a price-searcher 1. Changing price and Marginal revenue Demand Curve Coffees sold per week Price Total Revenue Average Revenue Marginal Revenue 0 $6.00 1 $5.50 2 $5.00 3 $4.50 4 $4.00 5 $3.50 6 $3.00 7 $2.50 8 $2.00 9 $1.50 10 $1.00 Graph the demand curve: Show the revenue loss when price is reduced from $3.50 to $3.00 Show the revenue gain when price is reduced from $3.50 to $3.00 Graph demand curve for the firm along with marginal revenue.
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5 2. Maximizing profits Demand Curve Coffees sold per week Price Total Revenue Marginal Revenue Total Cost MC ATC Profit 0 $6.00 2 1 $5.50 4 2 $5.00 5 3 $4.50 7 4 $4.00 9.25 5 $3.50 12 6 $3.00 16 7 $2.50 24 8 $2.00 33 9 $1.50 46 10 $1.00 61 Where should the above firm produce? Graph demand, MR, MC, and ATC: Show profit on the graph.
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6 III. Contestable markets & competitive process Contestable market - A market where the cost of entry is low. Should have lots of competition in this market & zero economic profits.
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7 IV. Comparing competitive price searchers to price takers markets Similarities : 1. Low barriers to entry No economic profits 2. Strong incentives to manage & operate business efficiently 3. Incentive to adopt cost-reducing technology etc. 4. An unexpected in market demand Higher prices, short-run profits, expanded output & entry of new firms prices to ATC (Economic profit=0) Differences : 1. Firms face different demand curves Price takers (pure competition)- Horizontal demand curves Price searchers - Downward sloping demand
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8 Implication : Graphs : 2. Price-searchers have the incentive to advertise 3. Price-searcher markets provide entrepreneurs with a strong incentive to innovate and find new, better ways of doing things
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V. A special case: Price discrimination Price discriminator - A seller that can charge different consumers different prices Ex : To price discriminate a producer must be able to: 1. Identify at least two groups with different price elasticies of demand & 2. Prevent those who can buy at a low price from selling to those who are only able to buy at a high price. Graph:
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09_Producer3-Price Searchers_ - Firms: Price Searchers...

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