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3.17.10 – Lecture Notes, Econ 201

3.17.10 – Lecture Notes, Econ 201 - More of...

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3.17.10 – Lecture Notes, Econ 201 PERFECT COMPETITION LONG RUN In the LR, all inputs are variable. LONG RUN DIFFERENCES FROM SHORT RUN 1. Existing firms expand or contract by altering previously fixed capital 2. New firms can enter or old firms can close permanently a. WHAT LURES NEW FIRMS TO ENTER AN INDUSTRY? 1. Profits WHEN AND WHERE WILL THIS PROCESS END? WHERE IS THE NEW EQUILIBRIUM? ANGEL!!! Competitive Market Equilibrium in the LR: 1. Price must settle at the bottom of the firm’s long run average cost curve 2. Profits of the typical firm must be zero 3. The number of firms will adjust to provide the market quantity demanded at that price. 4. Market price is still determined by SR supply and demand IN THE NEW EQUILIBRIUM: 1. Price is unchanged 2. Firms quantity is unchanged 3. Industry quantity is increased Notice that in the competitive model resources flow to their most valued uses. In the last example, people demanded more apples and that’s what they got.
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Unformatted text preview: More of society’s resources flowed into the economy. The key to understanding when new firms will want to come into an industry, or existing firms leave, lies in role of profits; remember these ARE economic profits. Because economic profits are the difference between revenue and opportunity cost, the existence of profit means a firm is earning ANGEL. Zero Economic Profit is not always bad! “Pay yourself” is always included in the economic profit. LONG RUN PERFECT COMPETITION ECONOMIC PERFORMANCE 1. Economic Profit = 0 2. Casts at Minimum a. Efficient Scale of the Firm 3. Price = Marginal Cost a. Economic welfare maximized MONOPOLY Definition: One firm in the industry BASES FOR A MONOPOLY 1. Monopoly on resources 2. Government Created a. Patent—20 years b. Franchise 3. Natural Monopoly a. When single firm can produce cheaper than many...
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