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Questions and Answers
What leads to a reduction in the equilibrium price in a perfectly competitive market?
What leads to a reduction in the equilibrium price in a perfectly competitive market?
What is the result of external positive economies in an industry?
What is the result of external positive economies in an industry?
Which scenario would result in a long run average cost increase for producers?
Which scenario would result in a long run average cost increase for producers?
How do producers achieve the equilibrium quantity of a product in the long run?
How do producers achieve the equilibrium quantity of a product in the long run?
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In the context of long run economic profit, what can a producer do to maintain profitability?
In the context of long run economic profit, what can a producer do to maintain profitability?
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What is the long run outcome for total economic profit in a perfectly competitive market?
What is the long run outcome for total economic profit in a perfectly competitive market?
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How does the entry of new producers impact the market in the presence of positive economic profits?
How does the entry of new producers impact the market in the presence of positive economic profits?
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What occurs when producers exit the market in response to negative economic profits?
What occurs when producers exit the market in response to negative economic profits?
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What happens to the market equilibrium price when the equilibrium price equals the minimum long run average cost?
What happens to the market equilibrium price when the equilibrium price equals the minimum long run average cost?
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What is the relationship between marginal cost and market equilibrium price in long run equilibrium?
What is the relationship between marginal cost and market equilibrium price in long run equilibrium?
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Which statement accurately describes the concept of minimum efficiency size in production?
Which statement accurately describes the concept of minimum efficiency size in production?
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How does economic profit influence the number of producers in a market in the long run?
How does economic profit influence the number of producers in a market in the long run?
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What must occur for the market to reach long run equilibrium regarding marginal social cost and benefit?
What must occur for the market to reach long run equilibrium regarding marginal social cost and benefit?
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What happens when the market equilibrium price is less than the minimum long run average cost?
What happens when the market equilibrium price is less than the minimum long run average cost?
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At what point will firms in a perfectly competitive market earn normal profit?
At what point will firms in a perfectly competitive market earn normal profit?
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What is a characteristic of long run equilibrium in perfect competition?
What is a characteristic of long run equilibrium in perfect competition?
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How does the long run marginal cost relate to short run marginal cost in a perfectly competitive market?
How does the long run marginal cost relate to short run marginal cost in a perfectly competitive market?
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What role does the concept of 'invisible hand' play in perfectly competitive markets?
What role does the concept of 'invisible hand' play in perfectly competitive markets?
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What occurs at the long run equilibrium point E in a perfectly competitive market?
What occurs at the long run equilibrium point E in a perfectly competitive market?
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What does the market supply curve shift to the left indicate?
What does the market supply curve shift to the left indicate?
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What is true about firms in the long run under perfect competition?
What is true about firms in the long run under perfect competition?
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Which of the following accurately describes economic profit in the long run for firms in perfect competition?
Which of the following accurately describes economic profit in the long run for firms in perfect competition?
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Study Notes
Long Run Equilibrium in Perfect Competition
- Free entry and exit ensures that producers in a perfectly competitive market cannot earn positive or negative economic profits in the long run.
- Positive Economic Profit: Attracts new producers, shifting the supply curve rightward and decreasing the equilibrium price. This continues until the price equals the minimum long-run average cost.
- Negative Economic Profit: Forces producers to adjust their capital stock to the minimum efficiency size to avoid losses. If profits remain negative, producers exit the market, shifting supply leftward, increasing the price, and reducing losses.
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Long Run Equilibrium: Occurs when:
- Total economic profit is zero.
- Market price equals minimum long-run average cost.
- Marginal social cost equals marginal social benefit (both equal to the market price).
- The number of producers is such that the market supply curve intersects the demand curve at the minimum long-run average cost.
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External Factors:
- External positive economies: Lower the minimum long-run average cost by reducing input costs or increasing output with the same inputs.
- External negative economies: Increase the minimum long-run average cost by increasing input costs or decreasing output with the same inputs.
Efficient Allocation of Resources
- In perfect competition, producers are forced to operate at the minimum long-run average cost by adjusting the number of firms in the industry.
- Each firm uses the minimum efficiency size for optimal production.
- The long-run marginal cost is equal to the short-run marginal cost at the minimum efficiency size, the minimum long-run average cost, and the marginal social cost. This ensures efficient allocation of resources.
- Perfect competition achieves this by:
- Equating marginal social cost with marginal social benefit.
- Producing at the minimum long-run average cost.
- Encouraging producers to adopt the minimum efficient size for production.
Conclusion
- Perfect competition results in an efficient allocation of resources and maximizes total net social benefit.
- The market adjusts to changes in demand by adjusting the number of producers to ensure that the price remains at the minimum long-run average cost.
- Technological advancements and external positive economies lead to lower prices and efficient allocation of resources.
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Description
This quiz explores the concept of long run equilibrium in perfectly competitive markets. It covers the impacts of economic profits on entry and exit of producers, the adjustment of capital stock, and the conditions for achieving long run equilibrium. Test your understanding of these key economic principles.
