question
Distinguish between the short and the long run in pure competition
answer
In the long run,
-firms can expand or contract
-firms can enter and exit the industry
-firms can expand or contract
-firms can enter and exit the industry
question
Explain the long run equilibrium position for a competitive firm using entry and exit of firms to explain adjustments from non-equilibrium positions
answer
Only adjustments are from entry and exit
All firms have identical costs
Entry eliminates economic profits:
-increase in demand -> increase in economic profit
-incentive
-firms enter -> supply increases
-price falls back down to equilibrium
Exit eliminates loss:
-consumer demand declines
-incentive to leave
-firms exit
-supply decreases
-prices go up to equilibrium
All firms have identical costs
Entry eliminates economic profits:
-increase in demand -> increase in economic profit
-incentive
-firms enter -> supply increases
-price falls back down to equilibrium
Exit eliminates loss:
-consumer demand declines
-incentive to leave
-firms exit
-supply decreases
-prices go up to equilibrium
question
Describe the role of profits and losses in achieving the long run equilibrium
answer
An industry at equilibrium will have an economic profit of 0
Existing firms are earning only a normal profit
No tendency to enter or exit
Profits and losses provide incentive
Existing firms are earning only a normal profit
No tendency to enter or exit
Profits and losses provide incentive
question
Explain the shape of long-run industry supply curves in constant-cost and increasing cost-industries
answer
Constant cost:
-the entry and exit of firms does not affect resource prices or unit costs
-changes in demand does not effect the price, only changes the industry output
Increasing cost:
-the entry of new firms in response to an increase in demand will bid up resources prices and therefore increase unit costs
-increased industry output will be forthcoming only at higher prices
-the entry and exit of firms does not affect resource prices or unit costs
-changes in demand does not effect the price, only changes the industry output
Increasing cost:
-the entry of new firms in response to an increase in demand will bid up resources prices and therefore increase unit costs
-increased industry output will be forthcoming only at higher prices
question
Differentiate between productive and allocative efficiency
answer
Productive efficiency: requires goods to be produced in the least costly way
Allocative efficiency: societies scare resources are directed toward producing the goods and services that people most want to consume
-guaranteed in lon run equilibrium in pure competition
Allocative efficiency: societies scare resources are directed toward producing the goods and services that people most want to consume
-guaranteed in lon run equilibrium in pure competition
question
Productive efficiency
answer
requires foods to be produced in the least costly way
question
Allocative efficiency
answer
societies scarce resources are directed toward producing the goods and services that people most want to consume
question
Explain why allocative efficiency and productive efficiency are achieved where P=minimum ATC=MC
answer
Have to produce at minimum ATC and charge a price consistent with cost
Marginal benefit is equal to marginal cost
Maximum willingness to pay for the last unit is equal to the minimum acceptable price for that unit
Combined consumer and producer surplus are maximized
Marginal benefit is equal to marginal cost
Maximum willingness to pay for the last unit is equal to the minimum acceptable price for that unit
Combined consumer and producer surplus are maximized
question
Explain why allocative efficiency and productive efficiency are consistent with maximizing consumer and producer surplus and an efficient use of resources
answer
...
question
Evaluate the impact of creative destruction on purely competitive industries
answer
Creation of new products and methods of production destroys the old ones
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
