Chapter 9 Part 2

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Long-Run Equilibrium Characteristics:

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1. Economic Profit is Zero: Price is equal to the Short-Run Average Total Cost (SRATC)

2. Firms are producing the quantity of output at which Price is equal to Marginal Cost

3. No firm has an incentive to change its plant size to produce its current output (with P = MC), so Short-Run Average Total Cost (SRATC) is Equal to Long-Run Average Total Cost (LRATC)

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If Price is above SRATC:

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positive economic profits will attract firms to the industry

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Long-Run Equilibrium CANNOT exist if:

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firms have an incentive to enter or exit the industry in response to positive or negative profits

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If SRATC is greater than LRATC at the quantity of output where P = MC:

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the firm would have an incentive to change its plant size in the Long Run to a size that will give it the lowest Average Total Cost (Unit Cost)

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Suppose a good's lowest Unit Cost (AKA Average Total Cost) is $3 and the firm produces 1000 units and Total Cost is $3000.
If the firm makes the units at a higher price of $3.5, raising the Total Cost to $3500, then:

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$500 worth of resources were used that could have been used on other goods if the firm had exhibited Productive Efficiency

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Productive Efficiency

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When a firm produces its output at the lowest possible per unit cost (lowest ATC)

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Competitive Equilibrium 1:

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The industry starts out at Long-Run Competitive Equilibrium where P = MC = SRATC = LRATC

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Competitive Equilibrium 2:

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Then, Market Demand Rises for the product and the Equilibrium Price rises.

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Competitive Equilibrium 3

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The firm's Demand (AKA Marginal Revenue) curve Shifts Upward, and it produces more output

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Competitive Equilibrium 4

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Because of that, existing firms in the industry Increase their output quantity since now Marginal Revenue intersects Marginal Cost at a higher Quantity

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Competitive Equilibrium 5

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In the Long-Run, new firms view the positive economic change as an incentive to join the industry

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Competitive Equilibrium 6

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As new firms join the industry, the market Supply curve shifts to the Right, and Price Declines

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Competitive Equilibrium 7

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The Increase in Supply Lowers the Demand and Marginal Revenue curves for firms.
Older firms, which were around before Market Demand increased, cut back output

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Competitive Equilibrium 8

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Eventually, all firms earn zero economic profit and are in long-run competitive equilibrium

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Constant-Cost Industry

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An industry in which Average Total Costs do not change as industry output Increases or Decreases when firms enter or exit the industry, respectively

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If market Demand Increases for a good produced by firms in a Constant-Cost Industry price will:

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initially rise and then eventually fall to its original level

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For a Constant-Cost Industry, output is Increased without a change in price of inputs. Because of that, firms' Cost curves:

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do NOT shift

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If costs do not rise to reduce the profits in the industry, then price must fall. Price must fall to its original level before profits can be zero. This implies that the Supply curve:

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Shifts Rightward by the Same amount that the Demand curve shifts Rightward

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A Constant-Cost Industry is characterized by a _ Long-Run Supply curve on a graph.

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horizontal

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Increasing-Cost Industry

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Average Total Costs (Unit Costs) Increase as firms enter the Industry and Output Increases;
Average Total Costs Decrease as firms exit the Industry and Output Decreases

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If market Demand Increases for a good produced by firms in an Increasing-Cost industry, Price will:

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Rise, then eventually Fall to a level ABOVE its original level.

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An Increasing-Cost Industry is depicted by a(n) _ Long-Run Supply Curve

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Upward-sloping

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Decreasing Cost Industry

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Average Total Costs (Unit Costs) Decrease as firms Enter the Industry and Output Increases
Average Total Costs Increase as firms Exit the industry and Output Decreases

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If market Demand Increases for a good produced by firms in a Decreasing-Cost Industry, the Price will:

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Rise and then eventually Fall to a level BELOW its original level

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A Decreasing-Cost Industry is depicted by a(n) _ Long-Run Supply Curve

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Downward-sloping

1 of 25

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Long-Run Equilibrium Characteristics:

answer

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If Price is above SRATC:

answer

positive economic profits will attract firms to the industry

question

Long-Run Equilibrium CANNOT exist if:

answer

firms have an incentive to enter or exit the industry in response to positive or negative profits

question

If SRATC is greater than LRATC at the quantity of output where P = MC:

answer

the firm would have an incentive to change its plant size in the Long Run to a size that will give it the lowest Average Total Cost (Unit Cost)

question

answer

$500 worth of resources were used that could have been used on other goods if the firm had exhibited Productive Efficiency

question

Productive Efficiency

answer

When a firm produces its output at the lowest possible per unit cost (lowest ATC)

question

Competitive Equilibrium 1:

answer

The industry starts out at Long-Run Competitive Equilibrium where P = MC = SRATC = LRATC

question

Competitive Equilibrium 2:

answer

Then, Market Demand Rises for the product and the Equilibrium Price rises.

question

Competitive Equilibrium 3

answer

The firm's Demand (AKA Marginal Revenue) curve Shifts Upward, and it produces more output

question

Competitive Equilibrium 4

answer

Because of that, existing firms in the industry Increase their output quantity since now Marginal Revenue intersects Marginal Cost at a higher Quantity

question

Competitive Equilibrium 5

answer

In the Long-Run, new firms view the positive economic change as an incentive to join the industry

question

Competitive Equilibrium 6

answer

As new firms join the industry, the market Supply curve shifts to the Right, and Price Declines

question

Competitive Equilibrium 7

answer

The Increase in Supply Lowers the Demand and Marginal Revenue curves for firms.
Older firms, which were around before Market Demand increased, cut back output

question

Competitive Equilibrium 8

answer

Eventually, all firms earn zero economic profit and are in long-run competitive equilibrium

question

Constant-Cost Industry

answer

An industry in which Average Total Costs do not change as industry output Increases or Decreases when firms enter or exit the industry, respectively

question

If market Demand Increases for a good produced by firms in a Constant-Cost Industry price will:

answer

initially rise and then eventually fall to its original level

question

For a Constant-Cost Industry, output is Increased without a change in price of inputs. Because of that, firms' Cost curves:

answer

do NOT shift

question

If costs do not rise to reduce the profits in the industry, then price must fall. Price must fall to its original level before profits can be zero. This implies that the Supply curve:

answer

Shifts Rightward by the Same amount that the Demand curve shifts Rightward

question

A Constant-Cost Industry is characterized by a _ Long-Run Supply curve on a graph.

answer

horizontal

question

Increasing-Cost Industry

answer

Average Total Costs (Unit Costs) Increase as firms enter the Industry and Output Increases;
Average Total Costs Decrease as firms exit the Industry and Output Decreases

question

If market Demand Increases for a good produced by firms in an Increasing-Cost industry, Price will:

answer

Rise, then eventually Fall to a level ABOVE its original level.

question

An Increasing-Cost Industry is depicted by a(n) _ Long-Run Supply Curve

answer

Upward-sloping

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Decreasing Cost Industry

answer

Average Total Costs (Unit Costs) Decrease as firms Enter the Industry and Output Increases
Average Total Costs Increase as firms Exit the industry and Output Decreases

question

If market Demand Increases for a good produced by firms in a Decreasing-Cost Industry, the Price will:

answer

Rise and then eventually Fall to a level BELOW its original level

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A Decreasing-Cost Industry is depicted by a(n) _ Long-Run Supply Curve

answer

Downward-sloping

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Chapter 9 Part 2

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