Chapter 8.3: Perfect Competition: Entry and Exit in the Long Run Flashcards
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Entry
When new firms enter the industry in response to increased industry profits.
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Exit
The long-run process of reducing production in response to a sustained pattern of losses.
What is the long-Run Equilibrium?
fig. 8.8
Where all firms earn zero economic profits producing at output level where P = MR = MC and P = min. AC. The LRS is drawn as a line between the two supply curves.
MR = D = AR = P
In the long-run, why do perfectly competitive firms make zero economic profit?
Explain using fig. 8.8
Industry types and long-run adjustment
Explain using fig. 8.9 and 8.4
Constant-cost industry:
* Entry of firms do not increase production costs.
* Equilibrium price stays the same and market quantity increases.
Increasing-cost industry:
* Entry of firms increase production costs.
* Equilibrium price and market quantity increase.
Decreasing-cost industry:
* Entry of firms decrease production costs. (new technology or economies of scale).
* Equilibrium price declines and quantity increases.
What is productive efficiency
See fig. 8.10
the ability of a firm to produce goods or services at the lowest possible average cost. P = min. ATC.
This means that they’re able to sell at lowest possible price and utilize society’s scare resources in the best possible way.
Allocative efficiency
Where the social benefits consumers receive are in line with the social costs of production. Achieved at P = MC.
* if P > MC, then firms should increase their production to match the value consumers put on the good.
* If P < MC, consumers values do not match the costs of production, then the firm should decrease their production to match the value consumers put on the good.
Why is P = MC considered allocatively efficient?
Price is a measure of marginal social benefit, while MC is a measure of the marginal social costs of production.
