PRICE-SEARCHER MARKETS WITH LOW ENTRY BARRIERS – Flashcards

A market where the firms have a downward-sloping demand curve and entry into and exit from the market are relatively easy

-Differentiated products are ones distinguished from similar products by such characteristic as quality, design, location, and promotion. -A term often used by economists to describe markets with a large number of sellers supplying differentiated products to a market with low entry barriers.

-Sellers in competitive price-searcher markets face competition both from firms already in the market and from potential new entrants. -If profits are present, firms can expect new rivals will be attracted.

-For any firm with a downward sloping demand curve (a price searcher) marginal revenue will be less than price. -Competitive price searcher firms will maximize profits by expanding output to the point where marginal cost rises to equal marginal revenue. - With free entry and exit, long-run equilibrium occurs with zero economic profit. Economic profits will attract new competitors to the market. The increased availability of the product will drive the price down until the profits are eliminated. Economic losses cause competitors to exit the market. The decline in the availability of the product will allow price to rise until firms are once again able to cover their average total costs.

-Losses and bankruptcy provide both the information and the incentives to move resources to more highly valued, more productive uses. -Resources are wasted in low-valued uses when failing businesses are subsidized by taking income from successful ones or protected by tariffs or other laws.

-When entry barriers are low, firms risk little by entering -Efficient production and zero economic profits should prevail in a contestable market.

-Is alert to business opportunities. -Makes correct decisions most of the time. -Backs away quickly when a business mistake is made. -We are unable to fully incorporate the function of the entrepreneur into economic models. >Entrepreneurs often make judgments when there is no decision rule that can be applied using only information that is freely available. >There is simply no way to model these complex decisions that involve uncertainty, discovery, and business judgment.

>Zero long-run economic profit > Responsiveness to consumer desires >Low barriers to entry

-Efficiency is violated because price exceeds marginal cost and firms fail to minimize average total cost. >Firms in the market engage in self-defeating and wasteful advertising. -Under the modern view, price searcher markets are not considered to be as inefficient as in the traditional view. >Product variety is stimulated. >Excess capacity may or may not be wasteful. >Advertising that influences choice cannot be judged in terms of efficiency.

Occurs when a seller charges different consumers different prices for the same product or service.

-A price searcher can gain from price discrimination if it can do two things: >Identify and separate at least two groups of consumers whose price elasticity of demand for the firm's product differ. >Prevent those who buy at the low price from reselling to the customers charged a higher price. -A higher price will be charged to groups with a more inelastic demand, while a lower price will be charged to groups with a more elastic demand. -Price discrimination can increase the total gains from trade and thereby reduce allocative inefficiency.

-Competition places pressure on producers to operate -Competition provides firms with a strong incentive to develop improved products and discover lower-cost methods of production. -Competition causes firms to discover the types of business structure and size that can best keep the per unit costs of production low. - In essence, competition harnesses personal self-interest and puts it to work elevating out standard of living