1. Micro Chapter 10 Price-Searcher Markets With Low Entry Barriers

2. 4 Learning Goals 1) 1)Characterize and explain the output decisions of competitive price-searcher markets. 2) 2)Bring out the role of the entrepreneur in decision making and firm organization. 3) 3)Determine the costs and benefits of this market structure 4)Justify the practice of price discrimination

3. Competitive Price- Searcher Markets

4. 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

5. The same decision rules apply: (1) Close if: MR < AVC, or TR < TVC (2) Keep producing as long as MR > MC But now the firm has some control over price

6. 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, some existing firms will exit and you will gain customers –Your demand curve will shift right

7. Graph of SR profits:

8. Graph of SR losses:

9. 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

10. Graph of LR:

11. 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

12. Complex Decision Making and the Entrepreneur

13. Read this section carefully on your own Main points: (1) An entrepreneur is someone who makes decisions based upon uncertainty, discovery, and business judgment. (2) These decisions cannot be graphed or modeled

14. Entrepreneurship and Economic Progress

15. Read this section carefully on your own

16. 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

17. Evaluating Competitive Price-Searcher Markets

18. 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

19. A Special Case: Price Discrimination

20. What is price discrimination? The practice of selling the same good to two or more groups of people at different prices

21. Who can price discriminate? Any firm that –(1) has a downward-sloping demand curve –(2) can separate its customers into at least two groups –(3) can prevent customers from re-trading the product

22. Why do firms price discriminate? To increase profits

23. 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

24. Graph: See handout “discrimgraphs.pdf”