Chapter 10 Flashcards
Profit maximization in the long run (3)
- easy entry and exit
- identical costs
- constant-cost industry
LR Perfect Competition easy entry and exit
opening or closing a current firm in an industry has no roadblocks
LR Perfectly Competition- Identical Cost
All firms in the industry have identical costs
LR Perfectly Competitive-Constant Cost Industry
entry and exit do not affect resource price or shift ATC or MC curve of individual firms
At LR Eqbm Firms earn a _______profit
normal profit
Entry of firms in Long Run eliminates___ in the SR and how
profit
frims enter causing the MC (supply curve) of the market to shift right, increase in supply, causing price to fall back to break even
Exit of firms in the Long Run eliminates____in the SR and how
losses
firms exit so MC (supply curve) of market to shift left, decrease in supply and resources, increasing the overall price back to break even
Break Even Point
Economic Profit is Zero
Perfectly Comp market Making profit in SR causing entry of firms in LR explain
Market Demand of Consumers shift leading to a higher price on the supply curve, firm takes to price and is now making profit in SR as P>ATC. In LR firms notice profit and enter the industry market supply now increase by shifting right the new eqbm price is now the original price as before the original demand shift, firms take new price and now P=ATC so economic profit is zero. Back at eqbm price just with higher quantity and more total firms in industry
Perfectly Comp Market Making losses in SR causing exit of Firm in LR explain
Market Demand of Consumers shift leading to a lower price on the supply curve, firm takes price and is now making losses in SR as P < ATC. In LR firms notice losses and exit the industry market supply now decrease by shifting left the new eqbm price is now the original price as before the original demand shift, firms take new price and now P = ATC so economic profit is zero. Back at eqbm price just with lower quantity and less total firms in industry
If market P < ATC (From no demand shift)
then in SR creates economic losses, causing firms to leave in LR. This decreases ATC and Supply and P=ATC in LR to be at break even
if market P > ATC (from no demand shift)
then in SR creates economic profit, causing firms to enter in the LR. This increase supply increasing ATC and price is brought down to minimum ATC in the long run
Long Run Eqbm of perfectly comp market characteristic (2)
- no economic profit so firms earn normal profit
- no tendency for firms to leave or enter as their accounting profit is equal to that the owner of firm could expect to receive in another industry
Long Run Market Supply Curves why does it change (2)
- changes when the number of firms in the industry change,
- changes when cost of individual firms in industry changes
- LR Supply for a Constant Cost Industry
2. will it shift ATC or MC curve?
- entry or exit of firms does not affect LRATC, constant resource prices
- does not shift LRATC or MC curve
compare industry demand for factors of production with demand for resources in a constant cost LR Supply
- industries demand for factors of production is small in relation to total demand of resources
LR supply for an increasing cost industry (2)
- entry of firms increase LRATC, so increases cost of all firms in the industry
- more firms more cost, less firms less cost
Price associated of product for a increasing cost industry
price will be associated based on number of firms, more firms=more cost (shift ATC and MC) so we need higher price to get to long run eqbm
LR supply for decreasing cost industry
entry decreases LRATC, so decreases cost for all firms in the industry
more firms attract more people so increase efficiency
Price associated of product for a decreasing cost industry
price associated based on number of firms in the industry. more firms=lower cost of resources so we sell product at a lower price to get to LR Eqbm
In LR what 2 types of efficiency is achieved
productive efficiency and allocative efficiency
productive efficiency and how consumers benefit
producing output level where P=minimum ATC (Normal Profit)
producing at the cheapest way possible
consumers benefit buy paying lowest price
Allocative Efficiency and how consumers benefit
producing where P=MC
producing the correct amount that society wants
consumer surplus
difference between what a consumer is willing to pay and what they actually pay (Market Price)
area below demand curve and above market price
producer surplus
Difference between the market price (actual payment) and the minimum price a producer would be willing to accept
Describe the LR surplus when for when a single firm is producing where P=MC=minimum ATC
The firms are all achieving productive and allocative efficiency so total surplus of consumers and producers is maximized in LR
allocative efficiency and MB, MC and distribution of resources to produce goods
when demand is above supply curve, MB>MC therefore society values goods more then the cost of them therefore companies should redirect resources to produce those goods
Dynamic Adjustments of Perfectly Comp Firms (3)
- change in consumer tastes
- resource supply
- technology
how might a change in demand affect efficiency and how will in the LR the industry will adjust to achieve allocative efficiency
demand increases which leads to increase marginal production which leads to profits which leads to efficiency loss so expansion of firms occur, supply increases, MP back at eqbm and allocative efficiency is resorted
invisible hand
businesses and suppliers seek to further self interest
what does self interest of of resource suppliers or businesses lead to (2)
- high efficient allocation of of resources
- maximum profits for industries and maximizes consumer satisfaction
In LR economic profit is zero so how might a entrepreneurs increase profits beyond normal profit (2)
is this is SR or LR
In the SR!
- decrease cost of production by innovating
- new product development=no competition
Creative Destruction what is it caused by
caused by competition and innovation
Creative Destruction what is it
- new ways of producing an existing product that will destroy an existing products production methods or producing a new product that will destroy the current existing product
creative destruction what does it lead to and example
destruction of the old products and methods ex tv cable to netflix & disney plus
