Economics Chapter 11 Flashcards
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Questions and Answers

Which of the following distinguishes the short run from the long run in pure competition?

  • Firms can enter and exit the market in the short run.
  • Firms can enter and exit the market in the long run but not in the short run. (correct)
  • Firms cannot change production levels in the long run.
  • Prices are fixed in the short run.

If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, what will happen?

New firms will enter this market.

Which of the following will not hold true for a competitive firm in long-run equilibrium?

  • Economic profits are zero.
  • P equals minimum ATC
  • P equals MC
  • P equals AFC (correct)

The MR = MC rule applies in what timeframe?

<p>In both the short and the long run.</p> Signup and view all the answers

Allocative efficiency is achieved when the production of a good occurs where:

<p>P = MC</p> Signup and view all the answers

The term productive efficiency refers to:

<p>The production of a good at the lowest average total cost.</p> Signup and view all the answers

If for a firm P = minimum ATC = MC, then:

<p>Both allocative efficiency and productive efficiency are being achieved.</p> Signup and view all the answers

What does the diagram above portray?

<p>The equilibrium position of a competitive firm in the long run.</p> Signup and view all the answers

If this competitive firm produces output Q, it will:

<p>Earn a normal profit.</p> Signup and view all the answers

By producing at output level Q:

<p>Both productive and allocative efficiency are achieved.</p> Signup and view all the answers

If production is occurring where marginal cost exceeds price, the purely competitive firm will:

<p>Fail to maximize profit and resources will be overallocated to the product.</p> Signup and view all the answers

Which of the following conditions is true for a purely competitive firm in long-run equilibrium?

<p>P = MC = minimum ATC</p> Signup and view all the answers

The primary force encouraging the entry of new firms into a purely competitive industry is:

<p>Economic profits earned by firms already in the industry.</p> Signup and view all the answers

If a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC, it should:

<p>Continue producing in the short run but leave the industry in the long run if the situation persists.</p> Signup and view all the answers

What is the outcome of long-run competitive equilibrium?

<p>Results in zero economic profits.</p> Signup and view all the answers

A constant cost industry is one in which:

<p>If 100 units can be produced for $100, then $150 can be produced for $150, $200 for $200 and so forth.</p> Signup and view all the answers

A purely competitive firm:

<p>Cannot earn economic profit in the long run.</p> Signup and view all the answers

At the long run equilibrium level of output, this firm's total revenue:

<p>Is $40.</p> Signup and view all the answers

Which of the following is true concerning purely competitive industries?

<p>In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits. (A)</p> Signup and view all the answers

Flashcards

Long Run vs. Short Run

Firms can enter and exit the market. Plant capacity can vary, but firms can't enter/exit markets in the short run.

Economic Profit Effect

Attracts new firms to enter; increases market supply which decreases prices, erosion of economic profits until they reach zero.

MR = MC Rule

Firms product up to the point where marginal revenue equals marginal cost. This rule dictates optimal output.

Allocative Efficiency

When the price of a good or service equals the marginal cost of producing it. (P=MC)

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Productive Efficiency

Production occurs at the lowest point on the average total cost (ATC) curve.

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P = MC = Minimum ATC

Both allocative (P = MC) and productive efficiency (minimum ATC) are achieved.

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Competitive Firm Equilibrium

Total revenue equals minimum average total cost, resulting in normal profit (zero economic profit).

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MC > P

Resources are over-allocated, reducing overall economic efficiency and potential profits.

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P = MC = Minimum ATC

A state of equilibrium is achieved where price equals marginal cost and is at the minimum average total cost.

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Entry of New Firms

Competition increases as more firms enter, resulting in the reduction of economic profits.

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Operating Below ATC

Continue in the short run; exit in the long run if the situation remains unchanged.

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Long-Run Equilibrium Outcomes

Firms earn zero economic profits, thus discouraging entry or exit, stabilizing market conditions.

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Constant Cost Industry

Costs rise proportionally with increased production (linear increase).

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Zero Economic Profits

Free entry/exit eliminates economic profits.

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Total Revenue

The firm's total income from selling its products.

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Short Run Profitability

Firms can make profits or losses in the short run. New entries in the market will result in normal profit scenarios.

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Production Decision

If the market price is above the break-even point (minimum AVC), the firm should continue to produce in the short run.

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Profit maximization

Where the perfectly elastic demand curve intersects the marginal cost curve.

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Pure Competition

A market structure in which a large number of small firms sell similar or identical products.

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Study Notes

Pure Competition Concepts

  • Short run vs long run: In the long run, firms can enter and exit the market; this is not possible in the short run.
  • Economic profit induces new firms to enter competitive markets, affecting market dynamics.

Market Equilibrium

  • In long-run equilibrium, the price equals average fixed cost (P = AFC) does not hold true for competitive firms.
  • The MR = MC rule is applicable in both short and long runs, guiding firms to optimal output levels.

Efficiency in Production

  • Allocative efficiency occurs when price equals marginal cost (P = MC).
  • Productive efficiency is achieved when production occurs at lowest average total cost.

Conditions for Equilibrium

  • For a firm where P equals minimum ATC and MC, both allocative and productive efficiency are realized.
  • Competitive firm equilibrium ensures that total revenue equals the minimum average total cost, leading to normal profit.

Impact of Production Decisions

  • When marginal cost (MC) exceeds price (P), firms fail to maximize profits, leading to over-allocation of resources.
  • In long-run equilibrium for a purely competitive firm, P = MC = minimum ATC.

Firm Behavior in the Market

  • Economic profits motivate new firms to enter the market, altering competition.
  • Firms with prices above minimum average variable cost but below average total cost should continue production in the short run but exit in the long run if the situation remains.

Long-Run Outcomes

  • Long-run competitive equilibrium results in zero economic profits, sustaining a stable market condition.
  • Constant cost industry: If production increases, costs remain proportional (e.g., 100 units for $100 and 200 units for $200).

Firm Profitability

  • A purely competitive firm cannot earn economic profits in the long run due to free market entry and exit, driving profits to normal levels.
  • At equilibrium, a competitive firm's total revenue can be defined or assessed, such as being $40 at a specific output level.

Short Run Dynamics

  • In the short run, firms can experience economic losses or profits, but long run adjustments will lead to normal profit scenarios.

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Test your knowledge with these flashcards covering key concepts from Chapter 11 of Economics. Explore important distinctions between the short and long run in pure competition, as well as the implications of economic profit for firms in a competitive market.

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