cmserver

# cmserver - ECON 1101 Handout: Final Notes These notes are...

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

ECON 1101 Handout: Final Notes These notes are only a partial summary of what was covered in lecture and in homeworks. These notes are not a substitute for your own notes from lecture and I reserve the right to test you on lecture or homework material not listed here. 1 Long-Run Competitive Equilibrium 1.1 Deﬁnitions Long-Run Competitive Equilibrium A market price P * , a market quantity Q * such that the number of ﬁrms in the market is constant, ie: there is no entry or exit. 1.2 Concepts Long-Run Competitive Equilibrium In order for there to be no entry or exit of ﬁrms in a market, the following must hold: Market Price P * = min( ATC ) Proﬁts=0 Q * , P * , and Q f are constant over time Shocks out of Competitive Equilibrium Note that any change in the market demand or supply curve will change market price P * and cause our condition for long run competitive equilibrium, P * = min( ATC ), to no longer hold. Steps to ﬁnding the new long-run equilibrium after a shift (shock) in market supply or demand. 1. Draw the graph of market and ﬁrm starting in long run competitive equilibrium ( P * = min( ATC )) 2. Add demand or supply shift to the market graph 3. Find new short-run equilibrium price and quantity in the market: Q * and P * 4. Given P * , ﬁnd new short-run proﬁt maximizing quantity Q f in the ﬁrm graph. ( Q f such that Marginal Cost=Marginal Revenue) 1

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

View Full Document
ECON 1101 - Final Notes Amanda M Michaud 5. Calculate short-run Proﬁts: Q f [ P * - ATC ( Q f )] 6. Moving to long run: Entry or Exit? If Profit > 0, there is entry. Increase supply in the market graph. If Profit < 0, there is exit. Decrease supply in the market graph. 7. Supply shift should move P * back to the original market equilibrium you started with: P * = min( ATC ). This is where proﬁts return to zero and entry and exit cease. Remember: The zero-proﬁt condition for long-run equilibrium refers to economic proﬁts, not accounting proﬁts. The ﬁrm is still earning money, it is just that they could not earn more money by doing something else. You should be able to compare short-run and long run Q f , Q * , P * , proﬁts and number of ﬁrms to the original equilibrium quantities for a demand or supply shift up or down. Bonus: Do the same analysis for a change in Average Total Costs. 2 Monopoly 2.1 Deﬁnitions Natural Monopoly A monopolistic market that arises from a decreasing average total cost curve (high ﬁxed cost, low and constant variable costs). 2.2 Concepts Monopolistic Market A monopolistic market is one in which the following hold: One producer and many consumers Producer sets price, consumers are price takers. No close substitutes Barriers to entry Large enough so no other ﬁrm may enter Imperfect information Why Do Monopolies Exist? The following are some reasons why the above conditions of a monopolistic market may be satisﬁed.
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 10/05/2011 for the course ECON 1101 taught by Professor Someguy during the Spring '07 term at Minnesota.

### Page1 / 17

cmserver - ECON 1101 Handout: Final Notes These notes are...

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

View Full Document
Ask a homework question - tutors are online