1. Price Takers and the Competitive Process
Micro Chapter 9
Price Takers and the
Competitive Process

2. 2 Learning Goals
Determine when a firm will temporarily or permanently go out of business
Explain the process of competition and identify the effects on consumers and producers

3. “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

4. Price Takers and Price Searchers

5. Skim this section
Focus on “competition as a dynamic process”

6. What are the Characteristics of Price-Taker Markets?

7. A price taker must set price equal to the market equilibrium price because:
Each firm is small relative to the market
Each firm sells an identical product
There are many buyers in the market
No barriers to entry/exit exist

8. How Does the Price Taker Maximize Profit?

9. The firm’s decision is a two-step process:
(1) Decide to open or close
(2) If open, decide how much to produce

10. (1) Decide to open or close
Consider this scenario:
Fixed costs $20,000
Variable costs $30,000
Total revenue $40,000

11. Q 9. 1. Fixed costs. $20,000. Variable costs. $30,000. Total revenue
Q Fixed costs $20,000 Variable costs $30,000 Total revenue $40,000 If the firm closes, how much is profit?
$20,000
$10,000 $0
-$20,000

12. Q9. 2. Fixed costs. $20,000. Variable costs. $30,000. Total revenue
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
$10,000
-$10,000
-$20,000

13. 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

14. (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

15. Q9.3 When the marginal cost of a firm is more than the market price of its product, the firm should
expand output.
reduce output.
maintain output.
charge more than the market price.

16. 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?
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.

17. 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

18. The Firm’s Short-Run Supply Curve

19. The Short-Run Market Supply Curve

20. Price and Output in Price-Taker Markets

21. Skip these sections

22. The Role of Profits and Losses

23. Competition Promotes Prosperity

24. Here are the main points I want you to understand
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

25. Watch video: Stossel Micro Clip 09-WalMart, competition and cost control

26. Q9.5 The dynamic process of competition
is hindered by the self-interest of business decision makers.
puts the profit motive of sellers to work for buyers.
conflicts with the interest of consumers when businesses pursue profit rather than the public interest.
will permit business decision makers to earn long-run economic profit unless they are regulated by government.

27. Question Answers:
9.1 = 4
9.2 = 3
9.3 = 2
9.4 = 3
9.5 = 2