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On slates1. Describe a time you paid more money for a good or service you thought was better quality.2. Describe a time when you bought a good or service that was cheaper than other brands.3. Does competition make us perform better?
Competition experiment• 3 groups• 1 person• Group of 3, outside• Everyone else, silent
• Think about price & quality
I will buy one for up to $1.50Widget:
WPrice: $
Your name:
Pricing power• Some firms can choose their own price• Price makers
• Some firms must take the prices the market gives them
• Price takers
On your slate4. How much pricing power did you have during the simulation? Explain why.5. Why do consumers benefit from competition? Use a specific business examples in your answer6. Why do producers suffer from competition? 7. Why does pricing power depend on the number of firms in the market?
I Love Lucy clip
On slatesIf I’m going to the store to buy paper clips, what am I going to care most about as a consumer?
If I’m going to the store to buy a smart phone, what am I going to care most about as a
consumer?
Is this product cheap or expensive?Is there a lot of variety in this product?Is this product easy to buy?Does this product become cheaper if I buy more
quantity?Is this product easy for a firm to make?Would this product be easy for a firm to leave the
market?
Economic Competition
• 5 basic market types:– Perfect Competition– Monopoly– Monopolistic Competition– Oligopoly– Monopsony
• Measures price/nonprice competition, and product differentiation
Perfect Competition Market• Features:• Many firms• Nearly identical products• No pricing power • “price takers”• Easy to start new firm• Easy to close down firm• Perfectly informed
consumers• Costs really important
Other Examples?Salt, gasoline, paper clips
Perfect Competition examplesOn your slate
1.Write 2-3 examples of perfect competition markets that I didn’t give you in class
2.If you were in a perfectly competitive market how could you make more revenue?
3.If you were in a perfectly competitive market how could you make more profit?
4.How might economies of scale help firms in perfect competition?
On slates1. 3 examples of
industries where firms are price takers
2. 3 examples of industries where firms
are price makers
3. Which type of industry would be best to be an
entrepreneur?
review
• On slates correctly draw:
• MC, ATC, AFC, AVC
• Formally collecting papers
FIRMS IN COMPETITIVE MARKETS 13
The Revenue of a Competitive Firm
• Total revenue (TR)
• Average revenue (AR)
• Marginal revenue (MR):The change in TR from
selling one more unit.
∆TR∆QMR =
TR = P x Q
TRQAR = = P
A C T I V E L E A R N I N G 1 Calculating TR, AR, MR
14
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$102
$10$101
n/a$100
TRPQ MRAR
$10
A C T I V E L E A R N I N G 1 Answers
15
Fill in the empty spaces of the table.
$50$105
$40$104
$103
$10
$10
$10
$10$102
$10$101
n/a
$30
$20
$10
$0$100
TR = P x QPQ∆TR∆Q
MR =TRQ
AR =
$10
$10
$10
$10
$10
Notice that MR = P
FIRMS IN COMPETITIVE MARKETS 16
MR = P for a Competitive Firm
• A competitive firm can keep increasing its output without affecting the market price.
• So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P.
MR = P is only true for firms in competitive markets.
FIRMS IN COMPETITIVE MARKETS 17
Profit Maximization
• What Q maximizes the firm’s profit? • To find the answer, “think at the margin.”
If increase Q by one unit,revenue rises by MR,cost rises by MC.
• If MR > MC, then increase Q to raise profit.
• If MR < MC, then reduce Q to raise profit.
Side by side graph
Cotton
Paper clip changesIndustry
FirmMetal price doubles
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