Foundations of the Market Price System by Milton M. Shapiro

Author:Milton M. Shapiro [Milton M. Shapiro]
Language: eng
Format: epub, pdf
ISBN: 978-1-61016-285-2
Publisher: University Press of America, Inc.
Published: 1985-11-06T16:00:00+00:00

Price-setting: Market vs. the Firm

In practice, of course, firms do not enter the market totally ignorant of the prices the market will fetch—without any preconception of the price demanders are willing to pay. On the contrary, firms make appropriate efforts to determine that particular selling price which would enable them to sell their given Qs at the expected profit margin. (This was briefly discussed in Chapter IV, and Chapter IX will deal at length with the relationship between selling price, profits, and costs.) But the point is this: Whatever price the firm initially sets on its product, it must do so with its fingers crossed, because only its eventual confrontation with market demand will determine whether its best-laid plans are successful or not—that is, whether it will be able to sell out its Qs at the original asking P.

In this connection, we shall note that when the S schedule in the graph pertains to the industry as a whole—and therefore represents the market S schedule instead of merely an individual firm’s S—we must be careful how we interpret the lower end of the S schedule (for example, see the S schedule in Figure 19). As we saw above, the bottom tip of the S indicates the minimum reservation price at which the firm is willing to sell. But in the case of the industry or market S schedule, where several firms are involved—each with different costs, profit expectations, and selling prices—we cannot presume to have a single, uniform, minimum reservation price for every firm. These minimum prices will undoubtedly vary from firm to firm. Hence, the lower tip of the S merely indicates the minimum price of only those firms which, for reasons of cost and/or profit margin, are able to enter the market with the lowest minimum prices.

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