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ECO100Y1 Lecture Notes - Lecture 9: Natural Monopoly, Perfect Competition, Longrun

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School
UTSG
Department
Economics
Course
ECO100Y1
Professor
James Pesando

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Document Summary

Demand increases, market price increases (from to ) Case 1: new firms have identical cost schedules as existing firms. In long run, p==minimum (unchanged) atc (cid:1005)(cid:1004),(cid:1004)(cid:1004)(cid:1004) (cid:862)old(cid:863) fir(cid:373)s a(cid:374)d (cid:1005),(cid:1004)(cid:1004)(cid:1004) (cid:862)(cid:374)ew(cid:863) fir(cid:373)s ear(cid:374) zero eco(cid:374)o(cid:373)ic profits. Long-run industry supply curve is horizontal (perfectly elastic) Case 2: the entry of 1,000 new firms results in higher wages and mc of all firms increase by [so atc of all firms increase by ] In the long run, p==[minimum] atc of all firms. Price falls from short-term level () as new firms enter industry, but only to . In eco100, we will focus only on case 1: as shown by case 2, we need to track how [minimum] atc changes as new firms enter industry to identify long-run industry supply curve. Single seller (of product with no close substitutes) Barriers to entry: legal barriers (legal monopoly) *o(cid:374)e pipeli(cid:374)e is efficie(cid:374)t, the go(cid:448)er(cid:374)(cid:373)e(cid:374)t (cid:449)o(cid:374) t (cid:373)ake (cid:1005)(cid:1004)(cid:1004) pipeli(cid:374)es.

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Related Questions

1. In a constant cost industry, P = AC = $20. Which sequence of events follows an increase in demand?

a. P = AC, firms make no economic profit, existing firms leave output unchanged, new firms enter the industry, profits remain normal, P = AC = $20.

b. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts left, price falls until profits return to $0.

c. P > AC, firms make an economic profit, existing firms expand output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits return to $0.

d. P < AC, firms suffer an economic loss, existing firms reduce output, new firms enter the industry, the short-run supply curve shifts right, price falls until profits exceed $0.

2. Describe the supply curve of a constant cost industry.

a. Upward sloping

b. Flat

c. Downward sloping, then upward sloping

d. Downward sloping

3. At the profit-maximizing output level P = MC, if P > AC then firms can earn an above-normal profit, causing entry into the industry. True or false?

4. In a competitive market, the amount of a good that is produced is such that social surplus is:

a. Minimized

b. Maximized

c. Zero

d. Hidden

In a competitive market with identical firms,

a.; free entry and free exit into the market require that firms earn zero economic profit in the long run even though they may be able to earn economic profits in the short run.

b. firms can earn economic profits in the long run if the long-run supply curve is upward sloping

c. an increase in demand in the short run will result in a new price above the minimum of the average total cost allowing the firms to earn a positive economic profit in both the short run and the long run 

d. firms can earn a positive economic profit in either the short run or the long run.

10) If firms in a competitive industry are earning positive economic profits, in the long run we expect A) the demand curve for the product will shift to the left, so that the price of the product will fall. B) the supply curve for the product will shift to the right as new firms enter the industry, causing industry output to increase and price to fall. C) there would be no change in the industry as long as P = MC for the individual firms. D) the individual firms will lower their price to discourage new firms from entering the industry. E) the government would intervene and force the firms to lower prices.