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Price Taker
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Produce identical products and because the firms are small relative to the market each must take the price established in the market
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Price Searcher
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Firms produce products that differ and therefore they can alter price. The amount the firm is able to sell is inversely related to the price it charges. Most real world firms are price searchers
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Competitive price taker market
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-Applies to some markets such as agricultural products
-Helps us understand the relationship between individual firms and market supply
-Increases our knowledge of competition
-Also called purely competitive markets
-Helps us understand the relationship between individual firms and market supply
-Increases our knowledge of competition
-Also called purely competitive markets
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Characteristics of price taker markets
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-Factors that promote cost efficiency and customer service
-Competition among firms for investment funds and customers
-Compensation and management incentives
-The threat of corporate takeover
-Competition among firms for investment funds and customers
-Compensation and management incentives
-The threat of corporate takeover
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Price takers demand curve
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-Market forces determine price
-Have no control over the price that they may charge, if price is above market price then consumers will simply buy elsewhere
-Price takers demand curve is perfectly elastic; it is horizontal at the price determined in the market
-Have no control over the price that they may charge, if price is above market price then consumers will simply buy elsewhere
-Price takers demand curve is perfectly elastic; it is horizontal at the price determined in the market
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Price taker Marginal revenue
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-The change in total revenue divided by the change in output
-MR will be equal to market price because all units are sold at the same price (market price)
-MR will be equal to market price because all units are sold at the same price (market price)
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Profit maximization price taker
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In the short run, the firm will expand output until MR is just equal to MC
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TR/TC approach
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-At low levels of output TC > TR and profits are negative
-When TR > TC profits are largest when the difference is maximized
-When TR > TC profits are largest when the difference is maximized
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MR/MC approach
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-At low level outputs MR > MC
-After some point, additional units cost more than the MR realized from selling them
-Profit is maximized by P = MR = MC
-After some point, additional units cost more than the MR realized from selling them
-Profit is maximized by P = MR = MC
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Operating in the short run
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-A firm experiencing losses but covering average variable costs will operate in the short run
-A firm will shutdown in the short run whenever price falls below average variable cost
-A firm will exit the market in the long run when price is less than ATC
-A firm will shutdown in the short run whenever price falls below average variable cost
-A firm will exit the market in the long run when price is less than ATC
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Short run supply curve
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-A firm maximizes profits when it produces at P = MC and its variable costs are covered
-The firms short run supply curve is that segment of its marginal cost curve above average variable cost
-The short run market supply curve is the horizontal summation of all the firms short run supply curves
-The firms short run supply curve is that segment of its marginal cost curve above average variable cost
-The short run market supply curve is the horizontal summation of all the firms short run supply curves
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Supply curve for the firm and market
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-Given resource prices, the firms MC curve is the firms supply curve
-As price rises above the short run shutdown price, the firm will supply additional units of the good
-As price rises above the short run shutdown price, the firm will supply additional units of the good
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Price and output in price taker markets
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-If price exceeds ATC, firms will earn economic profit
-Economic profit induces both the entry of new firms and expansion in the scale of operation of existing firms
In the long run, competition drives economic profit to zero
-Economic profit induces both the entry of new firms and expansion in the scale of operation of existing firms
In the long run, competition drives economic profit to zero
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Economic losses and exit
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-If ATC exceeds price, firms will suffer and economic loss
-Economic losses induce the exit of firms from the market, and a reduction in the scale of operation of the remaining firms
-As Market supply decreases, price will rise to average total cost
-Profits and losses will move the price toward the zero profit in long run equilibrium
-Economic losses induce the exit of firms from the market, and a reduction in the scale of operation of the remaining firms
-As Market supply decreases, price will rise to average total cost
-Profits and losses will move the price toward the zero profit in long run equilibrium
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Long run equilibrium
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-Quantity supplied and quantity demanded must be equal in the market
-Given the market price, firms in the industry must earn zero economic profit (P=ATC)
-Given the market price, firms in the industry must earn zero economic profit (P=ATC)
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Constant cost industry
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-Industry where per unit costs remain unchanged as market output is expanded
-Occurs when the industries demand for resource inputs is small relative to the total demand for the resources
-The long run market supply curve in a constant cost industry is horizontal
-Occurs when the industries demand for resource inputs is small relative to the total demand for the resources
-The long run market supply curve in a constant cost industry is horizontal
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Increasing cost industry
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-Per unit cost rises as market output is expanded
-Results because an increase in industry output generally leads to stronger demand and higher prices
-The long run market supply curve in an increasing cost industry is upward sloping
-This is the most common type of industry
-Results because an increase in industry output generally leads to stronger demand and higher prices
-The long run market supply curve in an increasing cost industry is upward sloping
-This is the most common type of industry
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Decreasing cost industry
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-Per unit costs decline as market output expands
-Implies either economies of scale exist in the industry or that an increase in demand for inputs leads to lower input prices
-Downward sloping
-These industries are rare
-Implies either economies of scale exist in the industry or that an increase in demand for inputs leads to lower input prices
-Downward sloping
-These industries are rare
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Profits and losses
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-Firms earn an economic profit by producing goods that can be sold for more than the cost of the resources required for their production
-Profit is a reward for production of a product that has greater value than the value of the resources required for its production
-Losses are a penalty for the production of a good that consumers value less highly than the value of the resources required for its production
-Profit is a reward for production of a product that has greater value than the value of the resources required for its production
-Losses are a penalty for the production of a good that consumers value less highly than the value of the resources required for its production
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