Chapter 9 - Micro Chapter 9 Competitive Process Price...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Micro Chapter 9 Competitive Process Price Takers and the 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 Price­ Taker 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 (1) Decide to open or close Consider this scenario: – – – Fixed costs $20,000 Variable costs $30,000 Total revenue $40,000 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 marginal benefit is greater than the marginal cost Specifically, keep producing as long as MR > MC 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 The Firm’s Short­Run Supply Curve The Short­Run Market Supply Curve Price and Output in Price­ Taker Markets Skip these sections The Role of Profits and Losses Competition Promotes Prosperity 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 ...
View Full Document

This note was uploaded on 04/02/2012 for the course ECO 2023 taught by Professor Joecalhoun during the Spring '12 term at Florida State College.

Ask a homework question - tutors are online