Chapter 9 Part 2 - Custom Scholars
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# Chapter 9 Part 2

question
Long-Run Equilibrium Characteristics:
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)
question
If Price is above SRATC:
positive economic profits will attract firms to the industry
question
Long-Run Equilibrium CANNOT exist if:
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:
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
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:
\$500 worth of resources were used that could have been used on other goods if the firm had exhibited Productive Efficiency
question
Productive Efficiency
When a firm produces its output at the lowest possible per unit cost (lowest ATC)
question
Competitive Equilibrium 1:
The industry starts out at Long-Run Competitive Equilibrium where P = MC = SRATC = LRATC
question
Competitive Equilibrium 2:
Then, Market Demand Rises for the product and the Equilibrium Price rises.
question
Competitive Equilibrium 3
The firm's Demand (AKA Marginal Revenue) curve Shifts Upward, and it produces more output
question
Competitive Equilibrium 4
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
In the Long-Run, new firms view the positive economic change as an incentive to join the industry
question
Competitive Equilibrium 6
As new firms join the industry, the market Supply curve shifts to the Right, and Price Declines
question
Competitive Equilibrium 7
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
Eventually, all firms earn zero economic profit and are in long-run competitive equilibrium
question
Constant-Cost Industry
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:
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:
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:
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.
horizontal
question
Increasing-Cost Industry
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:
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
Upward-sloping
question
Decreasing Cost Industry
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:
Rise and then eventually Fall to a level BELOW its original level
question
A Decreasing-Cost Industry is depicted by a(n) _ Long-Run Supply Curve
Downward-sloping
1 of 25
question
Long-Run Equilibrium Characteristics:
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)
question
If Price is above SRATC:
positive economic profits will attract firms to the industry
question
Long-Run Equilibrium CANNOT exist if:
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:
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
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:
\$500 worth of resources were used that could have been used on other goods if the firm had exhibited Productive Efficiency
question
Productive Efficiency
When a firm produces its output at the lowest possible per unit cost (lowest ATC)
question
Competitive Equilibrium 1:
The industry starts out at Long-Run Competitive Equilibrium where P = MC = SRATC = LRATC
question
Competitive Equilibrium 2:
Then, Market Demand Rises for the product and the Equilibrium Price rises.
question
Competitive Equilibrium 3
The firm's Demand (AKA Marginal Revenue) curve Shifts Upward, and it produces more output
question
Competitive Equilibrium 4
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
In the Long-Run, new firms view the positive economic change as an incentive to join the industry
question
Competitive Equilibrium 6
As new firms join the industry, the market Supply curve shifts to the Right, and Price Declines
question
Competitive Equilibrium 7
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
Eventually, all firms earn zero economic profit and are in long-run competitive equilibrium
question
Constant-Cost Industry
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:
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:
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:
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.
horizontal
question
Increasing-Cost Industry
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:
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
Upward-sloping
question
Decreasing Cost Industry
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:
Rise and then eventually Fall to a level BELOW its original level
question
A Decreasing-Cost Industry is depicted by a(n) _ Long-Run Supply Curve
Downward-sloping

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