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Chapter 5

ECON-2086EL Chapter Notes - Chapter 5: Marginal Cost, Trade Union, Pricing Strategies

Economics / Science Èconomique
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Market Struture
Firms Profit and Pricing
A firm takes into account explicit and implicit costs of production to set their prices. However, it all
depends on the market and its conditions when choosing a set price for the product. The amount of
suppliers, the homogeneity of the products, and the demand all play roles in what prices the producer
can charge. Below you will find the different market structures and how they affect the pricing of a
good/service (perfect competition; monopoly; monopolistic competition; and oligopoly)
Pricing in Perfect Competition
In a perfectly competitive market, all the producers (many) are producing and indistinguishable good.
Entrance and exit to the market is near costless. The firm does not control the price as it is set by the
market. Demand controls the price and supply is an aggregation of all the producers in the market. More
demand increases price, more firms enter the market, and the price lowers again as supply increases.
Allocative efficiency is found in perfectly competitive markets when the producers can only produce
what is demanded by the market and it is equal to their marginal cost. Productive efficiency occurs
because the market price (in the long-u) ill alays eual the iiu poit o each fi’s aeage
total cost curve. Productive efficiency means the firm is producing its output at the least possible cost.
As well, producer and consumer surplus are minimized in the perfect competition model.
Pricing Strategy for a Monopolist
As a monopolistic firm, you produce a good that is unique from all other firms. Setting the price is
determined by setting the output of production to earn the highest total profit for the firm and not just
highest unit profit. Increasing production will lower the price and vice versa. However, if demand falls
you stand a loss in profit. Price discrimination is a tactic used by monopolists where the charge different
prices for different markets or consumers in relation to their willingness to spend. Due to the looming
factor of possible competition entering the market, limit pricing can be used where the firm sets the
price just above costs to deter entrants to the market. As well, they may engage in predatory pricing
where they set the price of the good below cost to push all other competitors out of the market and
make it a monopoly. The firm will sustain a loss but only for a short period of time.
Pricing Output in Monopolistic Competition
In this market, there is many firms that produce similar but still different goods, in different markets,
with different services. Each product from each firm has a unique aspect to it. It is relatively small firms
that populate the industry. Entry and exit is rather easy but not completely costless. Similar to the
monopolist, the firms in the monopolistic competition market will set the price where marginal revenue
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