exam 2 - Economies group industries into four models based...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Economies group industries into four models based on their market structures: pure competition, pure monopoly, monopolistic competition, and oligopoly A purely competitive industry consists of a large number of independent firms producing a standardized product. Pure competition assumes that firms and resources are mobile among different industries. In a competitive industry, no single firm can influence market price. This means that the firm’s demand curve is perfectly elastic and price equals marginal revenue. We can analyze short run profit maximization by a competitive firm by comparing total revenue and total cost or by applying marginal analysis. A firm maximizes in the short run profit by producing the output at which total revenue exceeds total cost by the greatest amount. Provided price exceeds minimum average variable cost, a competitive firm maximizes profit or minimizes loss in the short run by producing the output at which price or marginal revenue equals marginal cost. If price is less that average variable cost, the firm minimizes its loss by shutting down. If price is greater than average variable cost but is less than average total cost, the firm minimizes its loss by producing the P=MC output. If price also exceeds average total cost the firm maximizes its economic profit at the P=MC output. Applying the MR (=P) = MC rule at various possible market prices leads to the conclusion that the segment of the firms short run marginal cost curve that lies above the firms average variable cost curve is its short run supply curve. In the long run the market price of a product will equal the minimum average total cost of production. At a higher price economic profits would cause firms to enter the industry until those profits had been competed away. At a lower price losses would force the exit of firms from the industry until the product price rose to equal average total cost. The long run supply curve is horizontal for a constant-cost industry upsloping for an increasing- cost industry, and downsloping for a decreasing cost industry. The long run equality of price and minimum average total cost means that competitive firms will use the most efficient known technology and charge the lowest price consistent with their production costs. That is, the firm’s which achieve productive efficiency. The long run equality of price and marginal cost implies that resources will be allocated in accordance with consumer tastes. Allocative efficiency will occur. In the market the combined amount of consumer surplus and producer surplus will be at a maximum. The competitive price system will reallocate resources in response to a change in consumer tastes in technology or in resource supplies and will thereby maintain allocative efficiency over time.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
In the long run the entry of firms into an industry will compete away any economic profits and the exit of firms will eliminate losses so price and minimum average total cost are equal. The long run supply curves of constant increasing and decreasing-cost industries are horizontal,
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/28/2010 for the course ECON 211 taught by Professor Burn during the Spring '08 term at RIT.

Page1 / 14

exam 2 - Economies group industries into four models based...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online