Chapter 12: Competition and The Invisible Hand

Elimination principle

The principle that in a competitive market, above normal profits are eliminated by entry and below normal profits are eliminated by exit.

Above normal profits are temporary

Invisible Hand Property 1

By producing where P = MC, profit seeking behavior results in the minimization of the total industry costs of production.

Invisible Hand Property 2

Entry and exit decisions work to ensure that labor and capital move across industries to balance production so that the greatest use is made of our limited resources.

What does a marginal cost curve look like?

When do firms enter a market?

When firms are making a profit

When should firms exit the market?

When firms are making losses, 0 profit.

Where are profits maximized?

When MC=MR