Chapter 9 Outline - 11-9-07

Chapter 9 Outline - 11-9-07 - Microeconomics Chapter#9...

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Microeconomics – Chapter #9 Outline – 11/9/07 CHAPTER #9 – The Rise and Fall of Industries MARKETS AND INDUSTRIES An industry is a group of firms producing a similar product o “Market” can also refer to a group of firms producing a similar product or, A “Market” can also refer to the consumers who buy the goods and the interaction of the producers and the consumers THE LONG-RUN COMPETITIVE EQUILIBRIUM MODEL OF AN INDUSTRY Long-run competitive equilibrium model – A model of firms in an industry in which free entry and exit produce an equilibrium such that price equals the minimum of average total cost. Setting up the Model with Graphs The price is on the vertical axis and the quantity produced is on the horizontal axis: o Quantity produced by a single firm o Quantity produced by all firms in the market Because the single firm cannot affect the price of the market, the price, which represents the given market or industry price, is shown by a flat line drawn in the left graph. A competitive market is one in which a single firm cannot affect the price. Entry and Exit . Free entry and exit – Movement of firms into and out of an industry that is not blocked by regulation, other firms, or any other barriers. o If profits are positive, there is incentive to enter the industry o If profits are negative, there is incentive to exit the industry o When profits are equal to zero, there is no incentive for either entry or exit More firms in the industry means that the market supply curve shifts to the right. Fewer firms in the industry means that the market supply curve shifts to the left. Long-Run Equilibrium A situation in which entry into and exit from an industry are complete and economic profits are zero, with price ( P ) equal to average total cost (ATC). Marginal cost cuts through the average total cost curve at its lowest point
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The quantity demanded equals the quantity supplied in the market AND profits are zero. AN INCREASE IN DEMAND Short-Run Effects . Suppose there is a shift in demand to the right o Higher price due to higher market price o As marginal production increases, marginal cost rises until it equals the new price o The typical firm is now earning profits. o We have gone from a situation in which profits were zero for firms in the industry to a situation in which profits are positive.
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