micro chp 10 preice search and low barrier entry PDF

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chapter 10 notes jesse wright...

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Chapter 10: Price Searcher Markets with Low Entry Barriers Competitive Price Searcher: A firm that 1. Has low barriers to entry 2. Faces a downward sloping demand curve (because they produce differentiated products) (also referred to as Monopolistic Competition)  

Because good substitutes are available, the demand curve faced by competitive price searchers is highly elastic A decrease in price will increase the quantity sold.

Differentiated Products: Products that are distinguished from similar products by characteristics like quality, design, and method of production Ex. Nike Shoes vs. other shoes Ex. Miller Beer vs. Natural Light Price Searcher Graph: In order to sell a higher quantity, a price searcher will have to lower price. Marginal Revenue will always be less then price for a price searcher MR < P Maximizing Profits A price searcher maximizes profits by producing where MR=MC. 1. If price > ATC, then firm makes an economic profit 2. If price < ATC, then firm makes an economic loss Long-run equilibrium: When firms in a price searcher market make an economic profit (loss), new firms will enter (exit) and drive price down (up).  In the Long-run, firms will make zero economic profit.  In Long-run equilibrium, both price takers and price searchers: 1. Have price equal to average total cost (ATC) 2. Make zero economic profit price taker: P = MR = MC competitive price searcher: P > (MR = MC)

Price discrimination: is where a seller charges different consumers different prices for the same product or service Two Requirements: 1. Identify and separate at least two groups with different elasticities of demand 2. Prevent those who buy at the low price from reselling to the customers who were charged the higher price.  Sellers can gain revenue  In some price discrimination markets consumers may be better off: 1. Allowing production when it would not have been possible otherwise (Both those charged more, and those charged less) 2. Increase total gains from trade  In all price discrimination markets: 3. Some consumers pay more 4. Some consumers pay less Competition will drive failing firms out of business and free up the resources used by that firm for more productive use. Entrepreneurship: An Entrepreneur is a person who introduces new products or improved technologies. Successful entrepreneurs will increase the value of resources Ex. Bill Gates Creative Destruction: The replacement of old products and production methods by innovative new ones that consumers judge to be superior.  This process generates economic growth and higher standards of living  Think of life today compared to life 100, 50, or even 20 years ago!...