Market structure c perfectly competitive market

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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 1. Define: a. price taker b. market structure c. perfectly competitive market Reviewing Facts and Concepts 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 percent.” 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 Concepts 5. How can a seller determine whether it is a price taker? 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 monopolistic market barrier to entry price searcher public franchise natural monopoly antitrust law Characteristics of a Monopoly 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 extremely difficult. monopolistic market 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 market. price searcher 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.

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