Podcast
Questions and Answers
What occurs in the long run when firms are in the market?
What occurs in the long run when firms are in the market?
What condition defines the efficient scale in the long run?
What condition defines the efficient scale in the long run?
What is the shape of the long-run supply curve in a perfectly competitive market?
What is the shape of the long-run supply curve in a perfectly competitive market?
In the long run, what adjusts to ensure all demand is satisfied at the price equal to minimum ATC?
In the long run, what adjusts to ensure all demand is satisfied at the price equal to minimum ATC?
Signup and view all the answers
At the point of minimum ATC in long-run supply, what relationship holds true?
At the point of minimum ATC in long-run supply, what relationship holds true?
Signup and view all the answers
Which outcome does not describe what happens in the long run when zero economic profits are achieved?
Which outcome does not describe what happens in the long run when zero economic profits are achieved?
Signup and view all the answers
What does it indicate if the price (P) is greater than the average total cost (ATC)?
What does it indicate if the price (P) is greater than the average total cost (ATC)?
Signup and view all the answers
Which factor directly influences the long-run supply curve to become horizontal at the minimum ATC?
Which factor directly influences the long-run supply curve to become horizontal at the minimum ATC?
Signup and view all the answers
What happens to the long-run supply curve when firms experience economic profits?
What happens to the long-run supply curve when firms experience economic profits?
Signup and view all the answers
Which of the following equations correctly represents the calculation of positive profit?
Which of the following equations correctly represents the calculation of positive profit?
Signup and view all the answers
If the price is less than the average total cost, which of the following statements is true?
If the price is less than the average total cost, which of the following statements is true?
Signup and view all the answers
The area between price and average total cost represents which of the following?
The area between price and average total cost represents which of the following?
Signup and view all the answers
What occurs in a market when there is zero economic profit in the long run?
What occurs in a market when there is zero economic profit in the long run?
Signup and view all the answers
In the case where P = ATC, which of the following scenarios is being described?
In the case where P = ATC, which of the following scenarios is being described?
Signup and view all the answers
What happens to the supply curve in the long run when firms enter the market due to positive economic profits?
What happens to the supply curve in the long run when firms enter the market due to positive economic profits?
Signup and view all the answers
Which of the following accurately describes the concept of a zero-profit equilibrium?
Which of the following accurately describes the concept of a zero-profit equilibrium?
Signup and view all the answers
What would be the effect on profit if the average total cost decreases while the price remains constant?
What would be the effect on profit if the average total cost decreases while the price remains constant?
Signup and view all the answers
If demand increases in the short run, what immediate effect does this have on price and quantity?
If demand increases in the short run, what immediate effect does this have on price and quantity?
Signup and view all the answers
Which of the following describes the firm's situation when it is producing at a loss-minimizing quantity?
Which of the following describes the firm's situation when it is producing at a loss-minimizing quantity?
Signup and view all the answers
In the context of competitive firms making zero profit, what is the status of accounting profit?
In the context of competitive firms making zero profit, what is the status of accounting profit?
Signup and view all the answers
If a firm has a marginal cost equal to the price and is making a loss, what can be inferred about the average total cost?
If a firm has a marginal cost equal to the price and is making a loss, what can be inferred about the average total cost?
Signup and view all the answers
What is the relationship between price and average total cost (ATC) in a long-run equilibrium for competitive firms?
What is the relationship between price and average total cost (ATC) in a long-run equilibrium for competitive firms?
Signup and view all the answers
What happens to price when the short-run supply curve shifts to the right due to an influx of firms?
What happens to price when the short-run supply curve shifts to the right due to an influx of firms?
Signup and view all the answers
What condition must be true for a firm to decide to stay in business despite making zero economic profit?
What condition must be true for a firm to decide to stay in business despite making zero economic profit?
Signup and view all the answers
What is the immediate effect on price when demand increases from D1 to D2?
What is the immediate effect on price when demand increases from D1 to D2?
Signup and view all the answers
When the equilibrium shifts from point A to point B, what happens to the quantity sold in the market?
When the equilibrium shifts from point A to point B, what happens to the quantity sold in the market?
Signup and view all the answers
What happens to the supply in the market when profits induce entry in the short run?
What happens to the supply in the market when profits induce entry in the short run?
Signup and view all the answers
In the long-run equilibrium, what is the relationship between price and average total cost?
In the long-run equilibrium, what is the relationship between price and average total cost?
Signup and view all the answers
What is the relationship between price and average total cost when firms are making profits in the short run?
What is the relationship between price and average total cost when firms are making profits in the short run?
Signup and view all the answers
What drives new firms to enter the market after an increase in demand?
What drives new firms to enter the market after an increase in demand?
Signup and view all the answers
At point C in long-run equilibrium, what change occurs in quantity sold compared to quantity Q1?
At point C in long-run equilibrium, what change occurs in quantity sold compared to quantity Q1?
Signup and view all the answers
What role does the long-run supply curve play in restoring equilibrium after a demand increase?
What role does the long-run supply curve play in restoring equilibrium after a demand increase?
Signup and view all the answers
Which points in the diagram indicate the short-run equilibrium before demand increases?
Which points in the diagram indicate the short-run equilibrium before demand increases?
Signup and view all the answers
How does the entry of more firms affect the overall market supply?
How does the entry of more firms affect the overall market supply?
Signup and view all the answers
Which of the following best describes the equilibrium price in the market immediately after the increase in demand?
Which of the following best describes the equilibrium price in the market immediately after the increase in demand?
Signup and view all the answers
What is the initial equilibrium quantity before the demand shift occurs?
What is the initial equilibrium quantity before the demand shift occurs?
Signup and view all the answers
What is the significance of price returning to P1 in the long-run equilibrium?
What is the significance of price returning to P1 in the long-run equilibrium?
Signup and view all the answers
What graphical change indicates new firms entering the market in the long run?
What graphical change indicates new firms entering the market in the long run?
Signup and view all the answers
Which curve represents the initial supply before new firms enter the market?
Which curve represents the initial supply before new firms enter the market?
Signup and view all the answers
What economic condition occurs immediately after new firms enter the market?
What economic condition occurs immediately after new firms enter the market?
Signup and view all the answers
Study Notes
Profit Maximization
- Profit is the difference between total revenue and total cost.
- A firm earns a profit when price is greater than average total cost.
- A firm incurs a loss when price is less than average total cost.
- If a firm's price exceeds its ATC, profit = (Price - ATC) x Quantity
- If a firm's price is less than its ATC, loss = (ATC - Price) x Quantity
Supply Curve
- In the long run, the process of entry and exit ends when firms in the market make zero economic profit, which occurs when price equals average total cost.
- The long-run supply curve is perfectly elastic, appearing as a horizontal line at the minimum average total cost point.
Long-Run Market Supply
- As a firm enters or exits the market, the number of firms adjusts ensuring all demand is satisfied, making the long-run market supply curve horizontal.
Why Do Firms Stay in Business With Zero Profit?
- Firms stay in business with zero profit due to the concept of opportunity cost - which is included in the total cost of a firm.
- In zero-profit equilibrium, economic profit is zero, but accounting profit is positive.
Increase in Demand
- An increase in demand shifts the demand curve outwards.
- An increase in demand in the short run leads to:
- Higher quantity
- Higher price
- Positive economic profit
- An increase in demand in the long run leads to:
- Entry of new firms
- Shift in the short-run supply curve to the right
- Price decreases back to minimum ATC
- Quantity increases
- Efficient scale
Zero Economic Profit
- Zero economic profit is achieved when the firm's price equals the minimum of average total cost.
- When a firm makes zero economic profit, it is still earning a normal rate of return, which means that the firm is doing just as well as it could be doing in any other industry.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers key concepts in economics regarding profit maximization, supply curves, and the behavior of firms in the market. Explore how pricing affects profits and losses, as well as the dynamics of long-run market supply when firms adjust to zero economic profit. Test your understanding of these fundamental principles.
