Micro Chapter 9
Price Takers and the
Competitive Process
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 PriceTaker 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
– Variable costs
– Total revenue
$20,000
$30,000
$40,000
Q 9.1
Fixed costs
$20,000
Variable costs $30,000
Total revenue
$40,000
If the firm closes, how much is profit?
$20,000
2. $10,000
3. $0
4. -$20,000
1.
Q9.2
Fixed costs
$20,000
Variable costs $30,000
Total revenue
$40,000
If the firm stays open, how much is profit?
$20,000
2. $10,000
3. -$10,000
4. -$20,000
1.
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
Q9.3 When the marginal cost of a firm is
more than the market price of its product, the
firm should
1. expand output.
2. reduce output.
3. maintain output.
4. charge more than the market price.
Q9.4 If an amusement park that is highly profitable during the
summer months is unable to cover its variable costs during the
winter months, which of the following would be the best
alternative?
1.
2.
3.
4.
raise its prices during the winter months.
lower its prices during the summer months.
operate during the summer, but shut down during the
winter months.
operate during all months of the year as long as its profits
during the summer exceed its losses during the winter.
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 Short-Run
Supply Curve
The Short-Run 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
Watch video: Stossel Micro Clip 09WalMart, competition and cost control
Q9.5 The dynamic process of competition
1. is hindered by the self-interest of business
decision makers.
2. puts the profit motive of sellers to work for buyers.
3. conflicts with the interest of consumers when
businesses pursue profit rather than the public
interest.
4. will permit business decision makers to earn longrun economic profit unless they are regulated by
government.
Question Answers:
9.1 = 4
9.2 = 3
9.3 = 2
9.4 = 3
9.5 = 2