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Unformatted text preview: CRs went up and the price of VCRs fell.
You can buy one today for about $60. The Defining Terms
a. price taker
b. market structure
c. perfectly competitive
market Reviewing Facts and
2. What is easy entry into a
market and easy exit out
of the market? same thing happened in the market for
calculators (the early ones with numerous
functions sold for about $400), the market for personal computers, the market for
DVD players, and many more markets. Profits May Be Taxed Away
Suppose we go back to the point in time
when the 200 firms in market X were all
earning profits. Now suppose a member of
Congress says, “The firms in market X are
earning huge profits. They do not deserve
them; they just happened to be in the right
place at the right time. The government
needs some additional money for some new
programs, so we ought to tax these profits. I
propose a special tax on these profits of 100
Congress goes along with this member,
enacts a special tax on the profits of the
firms in market X, and taxes away these
profits. With the profits taxed away, the reason for firms not currently in market X to
enter it is gone. If no new firms enter market
X, the supply of good X will not rise, and the
price of good X will not then fall. This situation leaves consumers paying a higher price
than they would have paid if the profits of
the 200 firms had not been taxed away.
The intended effect was to tax away the
profits of the 200 firms and to generate new
revenue for the government. The unintended effect was that consumers ended up
paying a higher price for good X than they
would have paid without the tax. 3. What quantity of output
does a perfectly competitive firm produce? What
price does it charge for its
product? Critical Thinking
4. Some of the 200 firms in
market X, a perfectly
competitive market, are
incurring losses. How will
these losses influence (a) exit out of the market,
(b) the supply of the good
produced in the market,
and (c) the price of the
good? Explain your
answers. Applying Economic
5. How can a seller determine whether it is a price
Section 1 A Perfectly Competitive Market 193 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 194 Focus Questions
What are the characteristics of a monopolistic market?
What are examples of barriers to entry?
Do monopolists ever face competition?
What purpose do antitrust laws serve?
What have been some of the major antitrust
laws? A Monopolistic
Market Key Terms
barrier to entry
antitrust law Characteristics of a
The three characteristics of a monopolistic market include the following:
1. The market consists of one seller.
2. The single seller sells a product that has
no close substitutes.
3. The barriers to entry are high, which
means that entry into the market is
A market structure characterized by (1) a single
seller, (2) the sale of a
product that has no
close substitutes, and
(3) extremely high barriers to entry.
barrier to entry
Anything that prohibits a
firm from entering a
A seller that can sell
some of its output at various prices. How Monopolists Differ
from Perfect Competitors
Perfectly competitive firms are price takers. A monopoly firm (or monopolist) is a
price searcher. In contrast with a price
taker, a price searcher can sell some of its
product at various prices (for example, at
$12, $11, $10, $9, and so on). Whereas a
price taker has to “take” one price—the
equilibrium price—and sell its product at
that price, the price searcher has a list of
prices from which to choose. The price
searcher “searches” for the best price, the 194 Chapter 8 Competition and Markets price that generates the greatest profit or, in
some cases, the price that minimizes losses.
Which of the many possible prices is the
best price? To answer this question, back up
and consider the questions that the monopoly
firm, like any firm, has to answer: (1) How
much do we produce? (2) How much do we
charge? The monopoly firm, like any firm,
will produce that quantity of output at which
marginal revenue equals marginal cost.
Now suppose that for a monopoly firm
this quantity turns out to be 20,000 units.
What is the best price to charge for each
unit? The best price turns out to be the highest price at which all 20,000 units can be
sold. If only 15,000 units of the 20,000 units
are sold at a price of $14, then $14 is not the
best price. But if at $13, all 20,000 units can
be sold, then $13 is the best price. Again, the
monopoly firm seeks to charge the best price
possible, which is the highest price at which
it can sell its entire output.
Here is the problem for the monopolist:
It does not know what its best price is. So, it
has to search for it through a process of trial
and error. It may charge one price this week,
only to change it next week. Over time, a 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 195 How might the
owner of th...
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This document was uploaded on 01/16/2014.
- Winter '14