CHAPTER 14: COMPETITVE MARKET EQUILIBRIUM Flashcards
(20 cards)
Competitive equilibrium occurs when
All agents do the best they can taking prices and the economic environment as given.
Market demand:
Above joint
Below joint
Only consumer 1 demands good x1
Add quantity demanded by each individual to get the joint demand
Adding demand curves horizontally
Gives market demand curve
Market supply:
Below 40
Above 40
Only s^2 matters
Add both firms supply giving market supply curve
In competitive market individual choices form _____ which combine to create
Demand curves
Overall market demand
Supply curves come from
The marginal cost curve above average cost.
Together they form market supply
Short run market supply
Firm supplies output along its short run supply curve
Long run market supply
Only makes profit is price is above long run ac
Firms exit the industry in the long run if
Price falls below P, the lowest point of the long run AC.
Firms enter the industry in the long run if
Price rises above P
Entry and exit determine
Long-run supply
What happens when the market price is above a firms minimum long run average cost (p*)
Firms make positive economic profits.
What does profit above p* lead to in the long run
Attracts new firms, increasing market supply
What effect does entry of new firms have on market price
Puts downwards pressure on price
When does entry stop in the long run
When price falls to p* and profits are 0
What price will the market supply any quantity at in the long run (with identical firms)
At price p*, the minimum point of the long-run average cost
In the long run, who earns zero profit when firms have different costs
Only the marginal (highest-cost) firm
What happens when demand increase in a market with different cost firms
Price rises, and more efficient (lower cost) firms enter
What causes a new marginal firm to appear after demand increases
Entry of lower-cost firms pushes higher-cost firms to the margin
What shape does the long run market supply curve take with different cost firms
Slopes downwards.
