"How does the price and output behavior of a price-searcher compare with that of a price-taker? Be sure to explain your answer fully and illustrate with the appropriate diagrams. What are the implications of this for both allocative efficiency and technical efficiency? Again, use diagrams to illustrate where appropriate."
I am very comfortable with understanding the concepts of "price seeker", "price taker", "technical efficiency", and "allocative efficiency", however I don't know how price seeking/taking behaviors affects technical allocative efficiencies?
I'm not sure how the two relate? Can anyone assist? Thanks!
Sure! I can help explain the relationship between price seeking/taking behaviors and technical and allocative efficiency.
To begin with, let's define the terms:
1. Price seeker: A price seeker, also known as a price searcher or monopolistic firm, has some degree of market power and can influence the price of its product. Examples include monopolies or firms in monopolistic competition.
2. Price taker: A price taker operates in a perfectly competitive market and has no market power. It accepts the market price as given and does not have the ability to influence it. Examples include firms in perfect competition.
Now, let's discuss the behavior of these two types of firms in terms of price and output.
1. Price seeker: A price seeker faces a downward-sloping demand curve for its product, meaning that it can adjust the price and quantity produced to maximize its profits. The price-seeker's behavior is illustrated by a monopolistic firm's demand and marginal revenue (MR) curves. The monopolistic firm will produce where MR equals marginal cost (MC) to maximize its profits, resulting in a price higher than marginal cost and a quantity lower than what would be produced in a perfectly competitive market. This behavior leads to product differentiation, as the price seeker tries to make its product unique in order to charge a higher price.
2. Price taker: A price taker operates in a perfectly competitive market where it faces a horizontal demand curve, meaning it has no control over the price. The price taker's behavior is illustrated by a perfectly competitive firm's demand and marginal revenue curves, which are perfectly elastic. The perfectly competitive firm will produce where marginal cost equals price to maximize its profits, resulting in a price equal to marginal cost and a quantity determined by market forces.
Now, let's move on to the implications of price seeking/taking behaviors on technical and allocative efficiency, and use diagrams where appropriate.
1. Technical efficiency: Technical efficiency refers to producing output at the lowest cost possible. In terms of technical efficiency, price takers in perfectly competitive markets are considered to be more efficient compared to price seekers. This is because price takers produce at the minimum average cost (AC) of production, where AC equals marginal cost. This can be illustrated in a diagram where the perfectly competitive firm's MC curve intersects with its AC curve at its lowest point.
On the other hand, price seekers operate with market power and may produce at a higher average cost of production, as they have the ability to charge a price higher than marginal cost. This can be illustrated in a diagram where the monopolistic firm's MC curve intersects with its AC curve at a higher point compared to the perfectly competitive firm.
2. Allocative efficiency: Allocative efficiency refers to producing the goods and services that are most valued by consumers. In terms of allocative efficiency, price takers in perfectly competitive markets are considered to be more efficient compared to price seekers. This is because price takers produce where price (which represents marginal benefit, or consumer valuation) equals marginal cost, which captures the societal opportunity cost of producing an additional unit. Therefore, price takers produce where societal benefits are maximized.
Price seekers, however, do not produce at the point where price equals marginal cost. They produce where MR equals MC, and since MR is less than price, the price is higher. This means that price seekers do not achieve allocative efficiency, as they produce less quantity and charge a higher price compared to what would be produced in a perfectly competitive market.
To summarize, price seekers have market power and can influence price and output, which can lead to higher prices, lower quantities, and lower levels of technical and allocative efficiency compared to price takers in perfectly competitive markets.