Chapter 11 Intro to Microeconomics – Flashcards
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Long run in pure competition
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firms can expand or contract capacity and also enter or exit the industry
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Profit Maximization in the Long Run
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easy entry and exit identical costs constant-cost industry
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Long run equilibrium
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profits attract firms from less profitable industries and losses cause them to leave the unprofitable industry to find another more profitable one. the reflects the supply determinant
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Long run supply curves
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constant-cost industry: # of firms entering or leaving the industry do not affect costs increasing cost: entry or exit of firms does affect costs decreasing cost: changes are inverse
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productive efficiency
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producing goods in the least costly way
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allocative efficiency
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producing the mix of goods most desired by society
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triple equality
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P=MC=minimum ATC (most efficient)
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consumer surplus
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the difference between the maximum that consumers would be willing to pay and the market price
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producer surplus
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the difference between the minimum producers would be willing to accept for their product and the market price
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dynamic adjustments
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will occur automatically in pure competition when changes in demand, resource supplies, or technology occur.
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the invisible hand
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works in a competitive market system since no explicit orders are given to the industry to achieve
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innovations
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using better technology or improved business organization
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new product development
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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
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creative destruction
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refers to the idea that the creation of new products and new production methods destroys the market positions of firms committed to existing products and old ways of doing business
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patent
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gives the inventor exclusive rights to market and sell their product for 20 years
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In the long run in a purely competitive industry,
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entry and exit of firms can occur
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Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because
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when profits are zero, the firm is earning sufficient revenue to cover the opportunity cost
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Entry and exit help to improve resource allocation because
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losses result in exit and release resources to flow to markets where there are profits
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Entry and exit in a purely competitive industry occur in the
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long run, so that long-run economic profits are zero
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The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because if
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marginal revenue and marginal cost are equal, any other output level will result in reduced profit
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Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because price
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is constant regardless of the quantity demanded
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In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving
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productive efficiency
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The equality of P and MC means the firm is achieving
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allocative efficiency since the industry is producing the amount of product that equates society's valuation of that product and the price of the product
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The basic model of pure competition reviewed in this chapter finds that in the long run all firms in a purely competitive industry will earn normal profits. If all firms only earn a normal profit in the long run, firms will develop new products or lower-cost production methods because they can
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innovate and possibly earn an economic profit in the short run
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Consider the following statement: "Ninety percent of new products fail within two years—so you shouldn't be so eager to innovate." This statement is
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false because a firm could capture enough expected economic profit in the short run to cover the initial investment
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Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect it to be in the long run?
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1.25
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Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be:
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downward sloping
