Chap 11 Flashcards
Pure Competition in the Long Run
The long‑run equilibrium position
_____________ for a competitive industry is shown by reviewing the process of entry and exit in response to relative profit levels in the industry.
average total cost
Production will occur at firm’s minimum _________
If an industry is experiencing _________, firms will leave causing the supply curve to shift to the left. As supply falls, the product price rises until the economic losses are eliminated and Price equals minimum ATC.
economic losses
(Long run equillibrium) Entry eliminates profits
Firms enter
Supply increases
Price falls
(Profits attract firms from less profitable industries and losses cause them to leave the unprofitable industry to find another more profitable one. This reflects the supply determinant, a change in the number of sellers.
)
Exit eliminates losses (Long run equillibrium)
Firms leave
Supply decreases
Price rises
(Profits attract firms from less profitable industries and losses cause them to leave the unprofitable industry to find another more profitable one. This reflects the supply determinant, a change in the number of sellers.)
Constant-cost industry
long run supply curve
Entry/exit does not affect LR ATC
Constant resource prices
Special case
the number of firms entering or leaving the industry do not affect costs.
Increasing-cost industry
Long run supply curve
Most industries
LR ATC increases with expansion
Specialized resources
entry or exit of firms does affect costs. When firms enter the industry, input costs will increase as firms enter the industry and input costs will fall as firms exit the industry. The long-run supply curve is upsloping.
Decreasing-cost industry
Long run supply curve
, as the number of firms increase or decrease due to entry or exit, the industry costs change inversely. If demand for their product falls, firms will leave the industry causing input costs to rise. If demand for the product increases, firms will enter the industry causing input costs to fall. The long-run supply curve is downsloping.
In the long run, ________ is achieved
efficiency
Productive efficiency
Producing where P = minimum ATC
producing goods in the least costly way
Allocative efficiency
Producing where P = MC
producing the mix of goods most desired by society
Triple equality
P= MC= minimum ATC
means that pure competition leads to the most efficient use of society’s resources
Purely competitive markets will automatically adjust to:
Changes in consumer tastes
Resource supplies
Technology
Dynamic adjustments will occur automatically in pure competition when changes in demand, resource supplies, or technology occur. Disequilibrium will cause expansion or contraction of the industry until the new equilibrium at P = MC occurs.
“Invisibile Hand”
works in a competitive market system since no explicit orders are given to the industry to achieve
the P = MC result. The profit motivation brings about highly desirable economic outcomes
Technological Advance and Competition
Entrepreneurs would like to increase profits beyond just a normal profit
Decrease costs by innovating
New product development
(nnovation means using better technology or improved business organization. New product development means the firm may be first to the market with a new product but others will soon follow and may destroy the innovating firm’s position.)
