ECON-221 Chapter Notes - Chapter 13: Invisible Hand, Opportunity Cost, Marginal Cost
13 Oct 2020
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Document Summary
The price mechanism (the invisible hand: self interest often results in the socially optimal allocation of resources. Rationing function of price to distribute scarce goods to those consumers who value them most highly. Allocative function of price to direct resource away from overcrowded markets and towards markets that are underserved. Invisible hand theory adam smith"s theory that the actions of self-interested buyers and sellers all acting independently will often result in the socially optimal allocation of resources. Attracts productive resources into industries where economic profits are positive. Leaves declining industries to make economic losses: in a competitive industry, economic profit exists if tr > tc. Afc = fc/q (gets smaller as divided by bigger quantity) Mc = change in tc/change in q. Mc = change in vc: in a competitive industry, economic profit acts a signal for firms to enter the industry. In the short run firms can not enter the industry but in the long run they can enter.
