blanchard_ch10

In other words market supply increases and the market

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Unformatted text preview: falls. Two forces are at work in a market undergoing technological change. Firms that adopt the new technology make an economic profit, so there is entry by new-technology firms. Firms that stick with the old technology incur economic losses. They either exit the market or switch to the new technology. As old-technology firms disappear and new-technology firms enter, the price falls and the quantity produced increases. Eventually, the market arrives at a long-run equilibrium in which all the firms use the new technology and make a zero economic profit. Because in the long run competition eliminates economic profit, technological change brings only 211 temporary gains to producers. But the lower prices and better products that technological advances bring are permanent gains for consumers. The process that we’ve just described is one in which some firms experience economic profits and others experience economic losses. It is a period of dynamic change in a market. Some firms do well, and others do badly. Often, the process has a geographical dimension—the expanding new-technology firms bring prosperity to what was once the boondocks, and traditional industrial regions decline. Sometimes, the new-technology firms are in a foreign country, while the old-technology firms are in the domestic economy. The information revolution of the 1990s produced many examples of changes like these. Commercial banking, which was traditionally concentrated in New York, San Francisco, and other large cities now flourishes in Charlotte, North Carolina, which has become the nation’s number three commercial banking city. Television shows and movies, traditionally made in Los Angeles and New York, are now made in large numbers in Orlando. Technological advances are not confined to the information and entertainment industries. Even food production is undergoing a major technological change because of genetic engineering. REVIEW QUIZ 1 2 3 Describe the course of events in a competitive market following a permanent decrease in demand. What happens to output, price, and economic profit in the short run and in the long run? Describe the course of events in a competitive market following a permanent increase in demand. What happens to output, price, and economic profit in the short run and in the long run? Describe the course of events in a competitive market following the adoption of a new technology. What happens to output, price, and economic profit in the short run and in the long run? You can work these questions in Study Plan 10.5 and get instant feedback. We’ve seen how a competitive market operates in the short run and the long run, but is a competitive market efficient? 000200010270728684_CH10_p195-220.qxd 212 6/23/11 4:13 PM Page 212 CHAPTER 10 Perfect Competition x Competition and Efficiency A competitive market can achieve an efficient use of resources. You first studied efficiency in Chapter 2. Then in Chapter 5, using only the concepts of demand, supply, consumer surplus, and producer surplus, you saw how a competitive market achieves efficiency. Now that you have learned what lies behind the demand and supply curves of a competitive market, you can gain a deeper understanding of the efficiency of a competitive market. only ones who benefit from it, then the market demand curve measures the benefit to the entire society and is the marginal social benefit curve. Competitive firms produce the quantity that maximizes profit. We derive the firm’s supply curve by finding the profit-maximizing quantity at each price. So firms get the most value out of their resources at all points along their supply curves. If the firms that produce a good or service bear all the costs of producing it, then the market supply curve measures the marginal cost to the entire society and the market supply curve is the marginal social cost curve. Efficient Use of Resources Equilibrium and Efficiency Resources are used effi- Recall that resource use is efficient when we produce the goods and services that people value most highly (see Chapter 2, pp. 31–33, and Chapter 5, p. 96). If someone can become better off without anyone else becoming worse off, resources are not being used efficiently. For example, suppose we produce a computer that no one wants and no one will ever use and, at the same time, some people are clamoring for more video games. If we produce fewer computers and reallocate the unused resources to produce more video games, some people will become better off and no one will be worse off. So the initial resource allocation was inefficient. In the more technical language that you have learned, resource use is efficient when marginal social benefit equals marginal social cost. In the computer and video games example, the marginal social benefit of a video game exceeds its marginal social cost; the marginal social cost of a computer exceeds its marginal social benefit. So by producing fewer computers and more video games, we move resources toward a higher-valued use. ciently when marginal social benefit equals marginal s...
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This note was uploaded on 01/10/2013 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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