Economics Long-Run Equilibrium Quiz

A type of trade where countries exchange goods within the same industry, like cars or electronics.

The idea that as a company produces more of a good, the cost per unit decreases.

A market structure where many firms sell similar but differentiated products, with some price-setting power.

Goods within the same industry but with slightly different features, like different car models.

A trade model explaining trade based on economies of scale and imperfect competition, leading to trade in different varieties within industries.

The idea that larger countries tend to trade more, due to factors like greater potential market size and economies of scale.

Extra benefits from trading different varieties within an industry, beyond those from traditional comparative advantage.

The ability of a country to produce fewer varieties of goods at a larger scale, benefiting from economies of scale and offering more variety to consumers.

In a no-trade situation, firms produce at a quantity where price equals average cost (AC), leading to zero profits. This means there's no incentive for firms to enter or exit the market.

In a no-trade situation, firms produce at a quantity where marginal revenue (mr) equals marginal cost (MC). This is a short-term equilibrium, and the price is higher than the long-run equilibrium price due to limited competition.

When trade opens, firms face a larger market with more customers. Even though the number of firms doubles, the demand curve for individual firms becomes flatter (more elastic), indicating increased competition.

With increased competition from foreign firms, each domestic firm lowers its price to increase sales and potentially gain profits. However, due to the flatter demand curve, the price reduction leads to lower profits for all companies, even with increased sales.

When trade opens, firms initially lower prices expecting profits, but ultimately they end up making losses. This is because the price reduction isn't sufficient to offset the increased competition from more firms and the lower demand due to more variety.

The situation where a country has the same number of consumers, technology, and cost curves as another country, and both have the same number of firms in the no-trade equilibrium.

A firm in monopolistic competition faces a downward-sloping demand curve for its specific variety because it has some power to set prices due to product differentiation. However, this power is limited by the competition from other firms offering similar varieties.

Monopolistic competition allows firms to act as price setters within a certain range, but the presence of other firms producing similar varieties still restricts their monopoly power. This is because if a firm raises its price too much, consumers might switch to a competitor's variety.

In perfect competition, firms have no control over prices and cannot choose their output levels, as the market price is determined by forces beyond individual firm control.

The demand each firm faces in a monopolistic competition is a fraction of the total industry demand, with the fraction being the number of firms in the market (N). For example, if there are 2 firms in the market, each firm faces half of the total demand.

In monopolistic competition, new firms can easily enter the market due to minimal barriers and generate revenue from their unique product offerings. This creates competition within the market, influencing pricing, supply, and demand.

In a monopolistically competitive market, the firms' products are similar but not identical, allowing for a degree of differentiation in pricing and marketing strategies. This differentiation provides firms with a measure of control over their market share.

Monopolistic competition typically involves complete information, implying that both buyers and sellers possess full knowledge about the market conditions and product offerings. This transparency facilitates informed decisions and efficient market operations.

In the long run, firms making losses in an industry will exit, leading to higher prices and less competition.

When firms exit because of losses, the remaining firms gain market share and can charge higher prices, capturing more profits.

After firms exit, the remaining firms produce more, leading to lower costs per unit due to economies of scale.

When firms exit, the industry becomes more concentrated with fewer, larger firms, potentially leading to less competition and higher prices.

In the long run, the exit of firms leads to a new equilibrium with higher prices and a more concentrated industry structure.

Profits are higher for the remaining firms in the industry, as they control a larger portion of the market and can charge higher prices.

With fewer firms, the remaining firms face less competition, giving them more power to set prices and profit.

The process of firms exiting an industry due to losses, leading to a new long-run equilibrium with higher prices and less competition.

This type of equilibrium occurs when, through trade, a country specializes in a narrower range of goods within an industry, allowing it to produce more of each variety and benefit from economies of scale. This is the case when the number of firms in the industry after trade (NT) is less than the initial number of firms (NA) before trade.

Due to the competitive nature of the industry, firms set their prices at the level of their average cost (AC) to maximize their profits. When the demand curve is tangent to the average cost curve, firms earn zero economic profits.

The equilibrium price (pW) is reached when the demand curve intersects the marginal cost (MC) curve. This is where each firm produces the output level that optimizes its profit. The trade opens up new markets, leading to a lower price compared to pre-trade conditions.

In the long-run equilibrium, with the entry and exit of firms, the market reaches a state where the price is equal to the average cost, and each firm earns zero economic profits. Trade, in this context, leads to specialization and a reduction in the number of firms in the industry.

In a situation with free trade, the number of firms within an industry in each country becomes greater than the original number of firms before trade, implying a larger variety of goods for consumers.

With trade, each firm is able to produce a larger quantity of goods than before trade, allowing them to take advantage of economies of scale and lower production costs.

International trade leads to a lower price for the goods in the market compared to the pre-trade scenario. This occurs due to increased competition and the utilization of economies of scale.

Even after some firms exit the market due to increased competition, the total number of firms (and the variety of goods) in the market will still be higher than before trade.

The total number of firms with trade is greater than twice the number of firms in each country before trade, representing a significant increase in competition and variety.

The long-run equilibrium without trade features a price equal to average cost, leading to zero profits. Firms have no incentive to enter or exit the market in this situation.

The presence of economies of scale and imperfect competition, which is a situation where firms have some control over prices, leads to intra-industry trade. This trade is characterized by the exchange of similar, but differentiated goods within the same industry.