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CLEP Microeconomic Notes 1

Long run equilibrium dictates perfectly competitive

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Long Run equilibrium dictates perfectly competitive firms have an economic profit of zero aka, normal profit. a) When firms are making an economic profit new firms enter the market and drive profits to zero b) When firms are losing money, firms exit the market and prices go up b.i)Due to barriers of entry, a monopoly can generate greater than zero economic profits c) In the long run firms enter and exit a perfectly competitive market until firms are earning zero economic profits (normal profits) 118) Long Run Equilibrium occurs in a perfectly competitive firm when Average Total Cost (ATC) is at the minimum point on the ATC curve (a.i.1) In Long Run equilibrium all of the following apply: a.i.1.a.i.1. Quantity Demanded = Quantity Supplied a.i.1.a.i.2. Zero economic profits are made a.i.1.a.i.3. Optimum Production level is Marginal Revenue (MR) = Marginal Cost (MC) a.i.1.a.i.4. Price (P) = Minimum Average Cost a.i.1.a.i.5. Price (P) = Marginal Revenue 119) Short Run – in the short run profits and losses can be made by firms
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a) To maximize profits and minimize losses firms should produce at a level where Marginal Revenue (MR) = Marginal Cost (MC) b) When perfectly competitive firms earn Short Run economic profits, more firms enter the market 120) Firms primary decision is the Quantity (Q) to produce a) Marginal Revenue(MR) = Marginal Cost (MC) = optimum production Quantity (Q) 121) Price-Takers – firms must sell at the market dictated price 122) Barriers to entry – anything that makes it difficult for new firms to enter the market a) Example: political, legal and regulatory b) With perfect competition, barriers are minimal or non-existent 123) Perfect Competition – a market that has many firms providing many buyers with the same product 124) Characteristics of perfect competition are: (a.i.1) There are many firms and many consumers selling the same products (a.i.2) Each firm is a price-taker (firms are unable to influence price – causes horizontal demand) (a.i.3) There are no barriers of entry (a.i.4) Both the consumers and firms have perfect information (all consumers and producers know the price and quality of all the competition’s products) (a.i.5) Each firm selling the same product a.ii) It is difficult to influence the market due to the large number of firms and consumers in perfect competition market a.iii) Firms do not advertise in a perfectly competitive market (a.iii.1) Products are homogeneous (the same) no need to differentiate one producers peaches from another’s peaches. 125) Demand Curve – a.i) Horizontal for a firm – implies perfect elasticity and any increase in price would result in zero demand for the firm’s product, the firm is a price taker not a price maker a.ii) Downward sloping in the market’s demand 126) Product Markets (a.i.1) Perfect Competition – many firms selling a product (a.i.2) Monopolistic Competition – quite a few (more than oligopolies and monopolies) (a.i.3) Oligopoly – there are few sellers who are interdependent (a.i.4) Monopoly – one seller (no close substitutes) a.ii)
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