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

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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

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

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