Competition and the Invisible Hand

These flashcards cover the key concepts discussed in the lecture on competition and the invisible hand, including profit maximization, resource allocation, and the implications of competitive markets.

What condition must each firm meet to maximize profits in a competitive market?

Each firm must produce where Price equals Marginal Cost (P = MC).

What is the significance of the invisible hand in economics?

The invisible hand leads to the minimization of total industry costs through competition and signals for efficient resource allocation.

How do competitive markets balance production across industries?

Competitive markets allow profit-seeking behavior to redirect resources from low-value to high-value industries.

What happens when firms in an industry earn above-normal profits?

Above-normal profits attract new firms into the industry, increasing supply, which eventually drives down profits.

What is the elimination principle in economics?

Above-normal profits are eliminated by the entry of firms, and below-normal profits are eliminated by the exit of firms.

According to Joseph Schumpeter, what is the effect of innovation in capitalism?

Innovation leads to creative destruction, making competitors obsolete and driving economic progress.

What are the conditions under which the invisible hand fails to function?

The invisible hand fails when prices do not signal costs and benefits accurately, markets lack competition, or commodities are public goods.

Why is it important for marginal costs to be equal across firms in a competitive market?

To minimize total industry costs, firms must adjust output so that marginal costs are equal.