551-22 - CHAPTER 22 PRICE TAKERS AND THE COMPETITIVE PROCESS Last chapter looked at production costs In next two chapters we look at the

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CHAPTER 22 - PRICE TAKERS AND THE COMPETITIVE PROCESS Last chapter looked at production costs. In next two chapters, we look at the interaction of prices, profits and production for two groups of firms: PRICE TAKERS - Firms that must take/accept the market price, no control over setting price. Markets where: 1. Homogeneous, identical products: coffee, sugar, steel, oil, gold, beef, milk, corn, wheat, soybeans, eggs, etc. 2. Many small firms whose output is small relative to the market: e.g. wheat farms. 3. Sellers/producers can sell all output at the market price, but cannot sell at a price above market price. No pricing decision. 4. No barriers to entering the market/industry. Easy to get into the business, easy to get out. PRICE SEARCHERS (next chapter, CH 23) - 1. Downward sloping demand curve. 2. Products are not identical. 3. Firms may or may not be small relative to the market. 4. Firm faces a pricing decision, know that if it raises (lowers) prices, it will sell less (more). Examples: Nike, GM, Coke, Disney, Mars, etc. Most firms are price searchers. Why study price-takers? 1. Many industries are price-taker markets: agriculture, energy and utilities, commodities, currency, credit markets, etc. 2. Price taker markets are also known as "perfectly competitive markets" or markets with "pure or perfect competition" and they help us understand competition in the economy, e.g. competitive markets and competitive behavior. Price-searcher markets can be just as competitive as price-taker markets, they are not necessarily "less pure" than price-taker markets. Perfectly competitive markets: large numbers of small firms producing an identical, homogeneous product. "No brand names/no advertising" e.g. wheat farms. No barriers to entry or exit: easy to get in, easy to get out. Barriers to entry: obstacles to entering and competing in a market/industry. Occupational licensure for example (lawyers, doctors, accountants, barbers, plumbers, etc.). See page 470, Exhibit 1. Market prices are determined by market forces in the overall, world market for corn, soybeans, wheat, beef, etc. (Panel b) The individual firm/farm then faces a horizontal demand curve (panel a). If the price of wheat is $5/bu., the wheat farmer can sell his/her entire crop at $5/bu., but would find no buyers at $5.01/bu. There would be no reason to accept $4.99/bu., so the farmer is a "price taker" at $5/bu., and his/her output decision cannot influence the market price because their MGT 551: BUSINESS ECONOMICS CH – 21 Professor Mark J. Perry 1
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output is so small relative to the overall market. OUTPUT IN THE SR Firm's output decision is based on comparing Benefits (additional or marginal revenue, MR) vs. Costs of additional or marginal units of output (MC). MR = Δ Total Revenue / Δ Output = ΔTR/ ΔQ (where Δ = change)
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This note was uploaded on 01/23/2012 for the course FIN 551 taught by Professor Staff during the Spring '11 term at University of Michigan.

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551-22 - CHAPTER 22 PRICE TAKERS AND THE COMPETITIVE PROCESS Last chapter looked at production costs In next two chapters we look at the

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