EC4101 week 10 lecture 2
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Questions and Answers

What characterizes the long run supply curve of a competitive firm compared to the short run supply curve?

  • It is flatter because all inputs can be adjusted. (correct)
  • It is steeper and reacts less to price changes.
  • It starts at a lower shut down price.
  • It reflects higher fixed costs only.

    • What happens when the market price falls below the minimum long average cost (LAC)?

  • Firms must increase their production levels.
  • Firms continue to operate at a loss indefinitely.
  • Firms can cover their variable costs.
  • Firms begin to exit the market. (correct)

    • How does entry into the market by new firms affect the supernormal profits of existing firms in a competitive market?

  • Entry leads to additional market segmentation.
  • Entry increases existing firms' supernormal profits.
  • Entry decreases existing firms' supernormal profits. (correct)
  • Entry has no effect on existing firms' profits.

    • What defines the marginal firm in the context of a competitive market?

    <p>The last firm to enter the market making zero economic profit.</p> Signup and view all the answers

    Under what condition do firms in a perfectly competitive market earn zero economic profits in the long run?

    <p>When total revenue compensates for all opportunity costs.</p> Signup and view all the answers

    What does allocative efficiency imply in the context of perfectly competitive markets?

    <p>All gains from exchange are realized and welfare is maximized.</p> Signup and view all the answers

    What is the break-even price for a price-taking firm?

    <p>The market price at which it earns zero economic profit.</p> Signup and view all the answers

    Which of the following best describes productive efficiency in the long run for competitive firms?

    <p>Firms produce at the minimum point of their long-run average cost curve.</p> Signup and view all the answers

    Study Notes

    Competitive Market - Long Run Supply Curve

    • Perfectly competitive firms produce at the output level where price equals marginal cost (P=MC).
    • Firms choose points on the LMC curve.
    • Firms make profits when price is above long-run average cost (LAC).
    • Firms make losses when price is below LAC.
    • Firms will not produce at prices below the minimum LAC.
    • The long-run supply curve is the LMC curve above the shutdown price (minimum LAC).
    • A firm's long-run marginal cost curve (LMC) is flatter than its short-run marginal cost curve because it can adjust all inputs.
    • The long-run supply curve starts at a higher shutdown price.
    • Firms exit the market if price is below the minimum LAC (P<min LAC).
    • Entry/exit process stops when price equals minimum LAC (P = min LAC)
    • When firms make supernormal profits, other firms enter the market.
    • Normal profits occur when accounting profits cover the opportunity costs of the owner's money and time (economic profit =0).
    • The long-run supply curve is the part of the firm's LMC above its exit price (minimum LAC)
    • The marginal firm is the last firm to enter the market and makes zero long-run profits.
    • The break-even price for a price-taking firm is the market price at which it earns zero economic profit.

    Perfectly Competitive Markets

    • Each firm has the same marginal costs.
    • In the long run, each firm produces at the minimum long-run average cost (productive efficiency).
    • In the long run, firms make zero economic profits due to entry and exit.
    • Revenue compensates the owners for time and money (implicit costs).
    • Allocative efficiency is achieved because all gains from exchange are realised.
    • The model's use: a reasonable approximation of some world markets; benchmark for evaluating deviations from perfection; justification for market liberalization/privatization.

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    Related Documents

    EC4101 Week 10 Lecture 02 - Competitive Market PDF

    Description

    Test your knowledge on the long run supply curve in perfectly competitive markets. This quiz covers concepts such as marginal cost, average cost, and the conditions for firm entry and exit. Understand how firms respond to market prices and the implications for long run supply.

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