Econ Ch 9 Flashcards
price takers
the sellers who must take the market price in order to sell their product
They do not choose
Wheat farmers, cattle ranchers
Perfect substitutes, identical, agriculture, perfectly competitive market, even
price searchers
firms that choose the price they charge for their product, but the quantity they are able to sell is inversely related to price
Nike, nintendo
Differences, different prices for different products
characteristics of price taker markets
1.There are a large number of firms in the market
A lot of producers
2.Each firm produces identical products
- Their output is small relative to the total market
No one firm is dominating the market - They are able to sell all of their output as the market price
5.There are no barriers to entry or exit of firms in the market
Easy to jump in or out
barriers to entry
obstacles that limit the freedom of potential rivals to enter and complete in an industry of market
Excessive licensing and regulations
graphing price taker markets
perfectly elastic
marginal revenue
the change in total revenue derived from the sale of one additional unit of a product
For a price taker: Marginal Revenue (MR) = Price (P)
to maximize profits
a firm should increase output until marginal revenue is equal to marginal cost
Profit maximizing rule : MR = MC
A firm should produce when MR > MC
A firm should never produce when MC > MR
Graphically, firms should produce where the marginal cost curve intersects the marginal revenue curve MR = MC
profits and losses
MR=MC above ATC - economic profit
MR=MC below ATC - economic loss
remaining open in the short run
- it can cover its variable costs now TR > VC
- expects price to be high enough in the future to cover all of its costs
otherwise it will shut down
from 0 to q
p > avc stay open in the short run with losses
p < avc shut down
entry and exit in the long run
if firms are making an economic profit, new firms will enter and the high demand will eventually go down to the min of ATC
if firms are making an economic loss, firms will leave and the low demand will eventually go up to the min of ATC
long run equilibrium
when all firms in the industry are making zero economic profit
ATC, demand, MC all intersect at same place
TC TR are same box
role of profits and losses
keep costs low
Firms have the incentive to be efficient and innovative
Good firms stay (and possibly multiply), bad firms leave
