ECN 104 Chapter Notes - Chapter 10: Demand Curve, Creative Destruction, Economic Equilibrium

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jadeserval343

3 Feb 2017

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Chapter 10 perfect competition in the long run. 10. 1 - the long run vs the short run in perfect competition. Profit maximization in the long run: 3 assumptions. 10. 2 the long-run adjustment process in perfect competition. After all long-run adjustments, product price = minimum atc. Firms will leave the industry if short-run market price is less than total cost (economic loss: industry contraction decreases supply which eventually brings price back up to the minimum atc in the long run. If firms in the industry are earning a normal profit, there is no incentive for firms to enter or leave the industry. Entry eliminates economic profits, exit eliminates loss due to this behaviour^^ Interested in the effect that the entry/exit of firms has on the costs of individual firms in the industry. Long-run supply curve of constant-cost industry is perfectly elastic.

Related Questions

All of the following statements are true about pure competition in the long-run, except

a) The long-run adjustment in pure competition happens through shifts in the industry demand curve.

b) Entry and exit of firms will shift the demand curve facing the representative firm in the industry.

c) The long-run adjustment in pure competition happens through shifts in the industry supply curve.

d) Entry and exit of firms will push the economic profits of firms in the industry towards zero.

peargoose253

Suppose you are given the following information about an industry:

Qd = 6500 - 100P Market Demand

Qs = 1200P Market Supply

Assume further that a representative firm's cost function is::

C(q)= 722 + q^2 / 200 and Marginal cost of

MC(q) = q / 100

Assume further that firms are identical and the market is characterized by perfect competition.

A) Find the equilibrium price and quantity and the output the firm will produce in the short run. What is the profit of each firm?

B) Would you expect entry or exit to this industry in the long run? Explain. What effect would such entry/exit have on the market equilibrium?

C) What is the lowest price the firms may survive in the long-run? Is profit positive, negative, or zero at that price?

D) What is the lowest price the firm may sell in the short-run? Is profit positive, negative, or zero at that price?

pearferret188

Match the following.

constant-cost industry	A market structure in which a large number of firms sell a homogenous product or service with no restrictions on entry or exit and each firm is a price-taker.
increasing-cost industry	The demand facing a price-taking firm.
long-run equilibrium	A firm produces zero output but must still pay its fixed costs.
marginal revenue product	Price below which a firm shuts down in the short run.
perfect competition	All firms produce where price equals long-run marginal cost, and economic profits are zero.
perfectly elastic demand	Industry in which input prices rise as all firms in the industry expand output.
shut down	Industry in which input prices remain constant as all firms in the industry expand output.
the shut-down price	The additional revenue earned by hiring one more unit of a variable input.

viridianhare336

ECN 104 Chapter Notes - Chapter 10: Demand Curve, Creative Destruction, Economic Equilibrium

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