EC 252 University of North Alabama Price Taker and Searcher Markets Essay


InstructionsCompose a 5-page, double-spaced, 12-font paper with a detailed comparison/contrast of the perfectly competitive, price-searcher with low entry, and price searcher with high entry. Be sure to include the following points in your discussion:The number and market power of the buyers/sellers, and how these markets have developed as competitive or monopolisticHow price is determined in each, and the sellersÂ’ ability to control priceThe able to price discriminate and the potential benefit of price discriminationLevel of economic profit that can exist in each, and what happens when the economic profit for a firm in these markets becomes negativeWhat forces will limit the ability of a market to be competitive, i.e. what allows monopolies to form and continue to exist

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Module 6 Video Instruction
Perfect Competition
Characteristics of perfect competition. For perfect competition to exist a
number of conditions must be present: many buyers and sellers,
homogenous product, no collusion, perfect information, freedom of entry and
exit, no regulation, mobility of the factors of production. Under perfect
competition firms are price takers and not price makers.

Market Structures
This video explains how to draw and analyze a perfectly competitive market
and firm…and you get to meet Mr. DARP. Makes sure that you can use the
graph calculate total revenue, total cost, and profit.

Module 6 Required Reading
Gwartney, Stroup, Sobel and Macpherson Chapter 21: “Costs and the
Supply of Goods”

Reading: Perfect Competition: A Model
Notes from AmosWeb Encyclonomic
PERFECT COMPETITION AND DEMAND: The demand curve for the output
produced by a perfectly competitive firm is perfectly elastic at the going
market price. The firm can sell all of the output that it wants at this price
because it is a relatively small part of the market. As a price taker, the firm
has no ability to charge a higher price and no reason to charge a lower one.
The market price facing a perfectly competitive firm is also the firm’s average
revenue and, most importantly, its marginal revenue.
PRICE TAKER: A buyer or seller that possess so little market power that it has
no control over the price of the good, it must “take” or accept the going
market price. The market structure widely populated with a bunch of
powerless price takers is perfect competition. You should compare this term
with price maker. Other related terms worth a look are price leader, natural
monopoly, regulatory pricing.
PRICE DISCRIMINATION: Charging different prices to different buyers for the
same good. This is an age old practice for suppliers who have achieved some
degree of market control, especially those with a monopoly. The reason for
price discrimination, of course, is higher profit. To be a successful price
discriminator you must be able to do three things–(1) have market control
and be a price maker, (2) identify two or more groups that are willing to pay
different prices, and (3) keep the buyers in one group from reselling the good
to another group. In this way, you will be able to charge each group what
they, and they alone, are willing to pay.
MONOPOLY: A market structure characterized by a single seller of a unique
product with no close substitutes. This is one of four basic market
structures. The other three are perfect competition, oligopoly, and
monopolistic competition. As the single seller of a unique good with no close
substitutes, a monopoly firm essentially has no competition. The demand for
a monopoly firm’s output is THE market demand. This gives the firm
extensive market control–the ability to control the price and/or quantity of
the good sold–making a monopoly firm a price maker. However, while a
monopoly can control the market price, it can not charge more than the
maximum demand price that buyers are willing to pay.
MONOPOLISTIC COMPETITION: A market structure characterized by a large
number of small firms, similar but not identical products sold by all firms,
relative freedom of entry into and exit out of the industry, and extensive
knowledge of prices and technology. This is one of four basic market
structures. The other three are perfect competition, monopoly, and oligopoly.
Monopolistic competition approximates most of the characteristics of
perfect competition, but falls short of reaching the ideal benchmark that is
perfect competition. In fact, the best way to think of monopolistic
competition is our imperfect real world’s best approximation of perfect
competition. It aspires to perfect competition but doesn’t quite make it.
PRICE MAKER: A buyer or seller that possess sufficient market control to
affect the price of the good. Price market should be compared with the
alternative, price taker. From the selling side of the market, a monopoly is the
best example of a price maker. As the only seller in the market, a monopoly
firm has the ability to control the price. Firms operating under oligopoly and
monopolistic competition are also price makers, although to a lesser degree,
depending on their relative market control. From the buying side of the
market, a monopsony is also a price maker. As the only buyer in the market, a
monopsony firm is able to control the price. Firms operating under
oligopsony and monopsonistic competition are price makers, also to a lesser
COLLUSION: A usually secret agreement among competing firms (mostly
oligopolistic firms) in an industry to control the market, raise the market
price, and otherwise act like a monopoly. The reason for the secrecy is that
such behavior is illegal in the United States under antitrust laws. Collusion is
a characteristic trait of oligopolistic industries. Intense competition and
interdependent decision-making encourage oligopolistic firms to cooperate.
One way to lessen the competition among an oligopolistic rival is to join
forces through collusion. (The other way is through merger, but that’s
another entry.)

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Explanation & Answer:
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Price discrimination

Searcher Markets

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