econ unit 9 ch.11

Understand why __ competition leads to an efficient allocation of resources in both the short run and the long run.

perfect

Efficient Use of Resources

Resource use is efficient when society produces the goods and services people value most highly, meaning: ____ = ___

MSB=MSC 

If it’s possible to make someone better off ___making anyone else worse off, current resource allocation is ___.

without, inefficient 

• Producing unwanted computers while people demand more video games = inefficient.

Shifting resources from computers → video games makes people better off, no one worse off → ___improves.

efficiency 

If MSB > MSC → __ (make more).

underproduction

If MSC > MSB → ___ (make less).

overproduction

If MSB = MSC → __ allocation.

efficient

Consumer Choices (Demand Side)Consumers aim to maximize total satisfaction (___) given their budgets.

utility 

Each point on a consumer’s ___curve represents the best possible use of their money at that price.

demand 

When consumers alone benefit from a product, the market demand curve = ___ curve

MSB

Therefore: Consumers are efficient along their demand curve — they choose quantities where the last dollar spent yields the most __.

benefit

Producer Choices (Supply Side)

Firms aim to maximize profit by producing where Marginal Cost = Market __.

price

Each point on the supply curve represents efficient production at that __.

price

If producers bear all production costs, then the market supply curve = ___curve 

Therefore: Producers are efficient along their supply curve — they produce output using the least-cost combination of resources.

MSC 

Competitive Equilibrium and Efficiency

In a perfectly competitive market:

Consumers act efficiently on the demand curve (___).

MSB 

Firms act efficiently on the supply curve (__).

MSC 

Market equilibrium occurs where Demand = Supply, ___=___

MSB=MSC

At this point: MSB=MSC 

• Total Surplus = Consumer Surplus + Producer Surplus is maximized.

No one can be made better off without making someone else ___ off → __ efficiency achieved.

worse, allocative

Short Run

Firms may earn economic profits or losses. Entry and exit are ___.

Still efficient: MSB = MSC, though firms can profit ___.

limited, temporarily

Long Run

Entry and exit occur ___ until economic profit = __.

Perfectly ___: consumers pay the ___ feasible price, firms produce at minimum ___

freely, 0, competitive, least, ATC

• Even during adjustments, competition pushes markets toward efficiency.

In long-run equilibrium, firms make 0 economic profit, and P = ___ = minATC.

MC

Demand curve (D = ___): reflects consumers’ __ of sweaters.

MSB, valuation

Supply curve (S = ___): reflects firms’ __ costs.

MSC, production

• Equilibrium at point (8,000 sweaters, $20 each):

  • ___ = __

  • Efficient quantity produced

  • Consumer surplus (green area): below ___, above __

  • Producer surplus (blue area): above ___ , below _

  Total surplus (CS + PS) is maximized.

MSB=MSC, demand, price, supply, price

(b) Firm Level (Campus Sweaters)

• Firm faces market price MR = $20.

• Produces at MC = MR = $20, quantity = 8 sweaters/day.

• ___= $20 → zero economic profit.

LRAC (Long-Run Average Cost) is ___ → firm operates at the most efficient scale.

ATC, minimized 

Interpretation: Each firm produces at the lowest possible cost, earning ____ profit, while consumers pay the lowest sustainable price.
→ Long-run equilibrium = _____ and allocative efficiency.

normal, productive 

Efficient allocation

MSB = __

MSC

Consumer efficiency

Consumers maximize satisfaction → demand curve =__

MSB 

Producer efficiency

Firms minimize cost → __ ****curve = MSC

supply 

Short-run outcome

Temporary profits/losses; still__

efficient 

Long-run outcome

P = ___ = min ATC; zero economic profit; full efficiency

MC

Total Surplus

CS + PS (maximized in __competition)

perfect 

• Profit attracts entry of new firms and expansion of capacity.

___ increases → S₁ shifts ___, price falls to $700/tonne.

supply, right

Long-Run Adjustment

• Each firm’s ___falls to $700 → new equilibrium where MR₁ = MC.

• Firms reduce output to 0.45M tonnes.

• Economic profit → 0.

• Market output increases *** (due to more firms), individual output ↓.

MR

• Entry continues until __ = MC = min ATC.

• No firm earns economic profit.

• Resources are fully efficient: MSB = MSC.

The market achieves long-run allocative and productive efficiency.

P

____ competition leads to efficiency

Market equilibrium ensures MSB = __ → total surplus maximized.

perfect, MSC

Firms in long-run equilibrium

Produce at lowest possible cost → P = ___→ zero economic profit.

min ATC

Consumer advantage

Pay the lowest possible price consistent with firm survival.

Dynamic adjustment

___and ___ensure efficiency over time.

entry, exit 

Real-world parallel

The canola market behaves like perfect competition—price-taking firms, ___profit, and long-run __that restores efficiency.

temporary, entry 

Conditions for efficient allocation:

MSB=MSC; total surplus maximized

Why consumers are efficient on demand curve: Each point = optimal spending choice →

demand=MSB

Why producers are efficient on supply curve: Each point =____ → supply = MSC.

least-cost output 

Why competition yields efficiency: Competitive equilibrium equates ___ and __, maximizing total surplus.

MSB, MSC 

__efficiency → goods produced match __preferences.

allocative, consumer

___ efficiency → goods produced at the lowest cost.

productive

___ efficiency → entry and exit sustain zero economic profit in the long run.

dynamic

Through self-interested actions, both consumers and firms guide the market toward the ___optimal outcome—confirming Adam Smith’s “___ hand” principle.

socially, invisible