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Micro Chapter
p
10
Price--Searcher Markets With Low
Price
Entry Barriers
4 Learning Goals
1) Characterize and explain the output
decisions of competitive price-searcher
markets.
2) Bring out the role of the entrepreneur in
decision making and firm organization.
3) Determine the costs and benefits of this
market structure
4) Justify the practice of price discrimination
Competitive Price
Price-Searcher Markets
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These markets are also called
monopolistic competition because
they have characteristics similar to
other types of markets:
Many sellers
Low entry barriers
Sell differentiated but similar products
The same decision rules apply:
(1) Close if:
MR < AVC, or
TR < TVC
(2) Keep
K
producing
d i as long
l
as MR > MC
But now the firm has some control over
price
Output in the Short Run:
If profit exists, new firms will enter and
“steal” some of your customers
– Your demand curve will shift left
If losses exist
exist, some existing firms will exit
and you will gain customers
– Your demand curve will shift right
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Graph of SR profits:
Graph of SR losses:
Output in the Long Run:
As firms exit and enter the industry, the
firm demand curve shifts until zero profit
exists
At zero profit – no more entry or exit
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Graph of LR:
Key Point:
Since each firm produces a differentiated
product, we don’t speak of a market
supply or demand curve but only of a firm
supply and demand curve
Complex Decision
Making and the
Entrepreneur
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Read this section carefully on your own
Main points:
(1) An entrepreneur is someone who
makes
k decisions
d i i
b
based
d upon uncertainty,
t i t
discovery, and business judgment.
(2) These decisions cannot be graphed or
modeled
Entrepreneurship and
Economic Progress
g
Read this section carefully on your own
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Main Points:
Entrepreneurs play a vital role in economic
progress by discovering new products and
services that create wealth
Market forces provide incentives (and
signals) for entrepreneurs to try new ideas
Evaluating Competitive
Price--Searcher Markets
Price
What’s good and bad about this
kind of market structure?
A tradeoff exists –
– with fewer firms the ATC is lower (good) but
product variety is also lower (bad)
– with more firms the ATC is higher (bad) but
variety is also higher (good)
ATC is higher mainly due to brand
promotion
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A Special Case: Price
Discrimination
What is price discrimination?
The practice of selling the same good to
two or more groups of people at different
prices
Who can price discriminate?
Any firm that
– (1) has a downwarddownward-sloping demand curve
– (2) can separate its customers into at least
two groups
– (3) can prevent customers from rere-trading the
product
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Why do firms price discriminate?
To increase profits
How do firms price discriminate?
By setting a relatively high price for those
customers with inelastic demand and a
relatively low price for those customers
with elastic demand
Graph:
See handout “discrimgraphs.pdf”
“discrimgraphs.pdf”
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