Chapter 10 Micro

Chapter 10 Notes

  1. Firm Behavior in Pure Competition

    • Firms seek profits and avoid losses.

    • Free entry and exit in a purely competitive industry.

  2. Long-Run Equilibrium

    • In long-run equilibrium, MR = MC and price = minimum ATC ($50).

    • Economic profit is zero in this state.

  3. Market Supply and Industry Entry

    • As firms enter, market supply increases.

    • Long-run supply curve: Price remains constant, output adjusts.

  4. Industry Types

    • Constant-cost industry: Entry/exit has no effect on prices.

    • Increasing-cost industry: Expansion raises input prices (upward-sloping supply curve).

    • Decreasing-cost industry: Expansion lowers costs (downward-sloping supply curve).

  5. Efficiency in Pure Competition

    • Productive efficiency: Goods produced at the lowest cost.

    • Allocative efficiency: P = MC, resources allocated to products most wanted by society.

  6. Consumer & Producer Surplus

    • Consumer surplus: Difference between the max price consumers will pay vs. what they actually pay.

    • Producer surplus: Difference between the minimum price producers accept vs. what they receive.

  7. Entry and Exit Effects in the Long Run

    • Firms enter if profit exists.

    • Firms exit if losses occur.

    • In the long run, all firms break even (normal profit).

    • Perfect competition is highly efficient: P = MC = minimum ATC.

  8. Industry Adjustments in the Short Run

    • If firms earn supernormal profit, new firms enter → price decreases, quantity increases.

    • If firms experience losses, firms exit → price increases, quantity decreases.

  9. Long-Run Industry Adjustments

    • Constant-cost industry: Long-run supply is horizontal.

    • Increasing-cost industry: Supply curve is upward sloping.

    • Decreasing-cost industry: New entrants lower costs for existing firms (downward-sloping long-run supply curve).

  • Characteristics of Perfect Competition:

    • Homogeneous Products: All firms offer identical products, making them perfect substitutes.

    • Price Takers: Individual firms cannot influence market prices; they accept the prevailing market price.

    • Perfect Information: Both buyers and sellers have complete knowledge of prices, technology, and market conditions.

  • Implications of Perfect Competition:

    • Optimal Resource Allocation: Resources are allocated efficiently, maximizing total surplus in the economy.

    • Economic Profits: In the long run, firms earn zero economic profit, covering only their opportunity costs.

    • Market Dynamics: The absence of barriers ensures that firms can freely enter or exit the market in response to economic incentives.

Key Graphs in Perfect Competition

1. Long-Run Equilibrium in Perfect Competition
  • Graph Features:

    • MC (Marginal Cost), ATC (Average Total Cost), and MR (Marginal Revenue = Price) curves

    • MR = MC = minimum ATC at the equilibrium point

    • Firms make zero economic profit (normal profit)

📌 Key Insight: In the long run, price settles at the lowest ATC, ensuring productive and allocative efficiency (P = MC).


2. Long-Run Supply Curves

Different industry cost structures affect the long-run supply curve:

  • Constant-Cost Industry:

    • Graph: A horizontal long-run supply curve

    • Meaning: Entry/exit does not affect resource prices, so supply adjusts without price changes.

  • Increasing-Cost Industry:

    • Graph: An upward-sloping long-run supply curve

    • Meaning: As new firms enter, resource prices rise, causing higher costs and prices.

  • Decreasing-Cost Industry:

    • Graph: A downward-sloping long-run supply curve

    • Meaning: Expansion leads to lower costs, benefiting all firms in the industry.

📌 Key Insight: Industry behavior in the long run depends on how costs change as firms enter or exit.


3. Short-Run Firm Adjustments
  • Supernormal Profit (Short-run positive economic profit):

    • Graph:

      • The MR (Price) curve is above ATC, meaning firms earn a profit.

      • More firms enter, shifting supply right, lowering price.

    • Result: Market adjusts until normal profit remains.

  • Losses in the Short Run:

    • Graph:

      • The MR (Price) curve is below ATC, meaning firms incur losses.

      • Some firms exit, shifting supply left, raising price.

    • Result: Firms exit until normal profit is restored.

📌 Key Insight: The market corrects profits and losses by adjusting firm entry/exit.


4. Consumer & Producer Surplus Graph
  • Graph:

    • Demand and supply curves intersect at equilibrium.

    • Consumer surplus: Area above price and below the demand curve.

    • Producer surplus: Area below price and above the supply curve.

📌 Key Insight: Perfect competition maximizes total surplus, meaning no deadweight loss.

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