ECO231 Chap 11
Which of the following does an increasing-cost industry experience?
A downward shifting average total cost (ATC) curve as the industry contracts. An upward shifting average total cost (ATC) curve as the industry expands.
A competitive market generates efficiency and efficiency. (Enter one word for each blank.)
Blank 1: productive Blank 2: allocative
A competitive firm may realize an economic profit or loss in the run but will earn only a normal profit in the run.
Blank 1: short Blank 2: long or longer
profits in a competitive industry will attract new firms into the industry.
Economic
Why will firms choose not to enter an industry when marginal revenue, marginal cost, price, and average total cost are equal?
Existing firms are earning only normal profits.
What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?
Externalities
True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.
False
If there are losses in the long run, what adjustments will take place?
Firms will exit the industry until losses are eliminated.
New firms entering an increasing-cost industry will usually (increase/decrease) resource prices.
Increase
Which of the following describes consumer surplus?
It is the difference between the maximum price that consumers are willing to pay for a product and the market price for that product.
Which of the following does a decreasing-cost industry experience?
Lower costs as industry output expands.
(Allocative/Productive) efficiency means that goods are produced in the least costly way.
Productive
Which type of market produces the most efficient use of society's resources?
Pure competition
As firms exit the industry in the long run, market price rises and the losses for the remaining firms begin to subside. Firms will continue to exit until which of the following happens?
There are no economic losses.
True or false: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.
True
_ (one word) efficiency means that resources are distributed among firms and industries to yield a mix of goods and services that is most wanted by society.
allocative
An unfavorable shift or ______ in demand will upset the original industry equilibrium and produce ______.
decrease; losses
Creative captures the idea that the creation of new products and new production methods erodes the market positions of firms committed to existing products and old ways of doing business
destruction
Economists maintain that new firms are attracted into an industry due to:
economic profits
Higher resource prices will result in ______ total costs.
higher average
An industry whose average total cost curve shifts upward as the industry expands and shifts downward as the industry contracts is known as a(n) ______ industry.
increasing-cost
If the market price exceeds the firm's minimum average total cost (ATC), then it will ______.
incur an economic profit
The entry and the exit of firms in an industry are considered to be -run adjustments.
long
The long run, every purely competitive firm tends to operate at its ______.
minimum ATC
Economic profit for a firm will result if:
price exceeds average total cost
In this graph, the equilibrium price is $50 and is equal to a firm's average total cost. Therefore, the firm is earning ______ economic profits, or a(n) ______ profit.
zero; normal
In an increasing-cost industry, which of the following occur when an increase in product demand results in economic profits and attracts new firms to the industry?
Increased resource demand drives up resource prices. Each firm's ATC curve shifts upward.
Whether a purely competitive industry is a constant-cost industry or an increasing-cost industry, the final long-run equilibrium position of all competitive firms share which of the following characteristics?
In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost. Price or marginal revenue will settle where it is equal to minimum average total cost. In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost.
Which of the following statements are true about allocative efficiency?
It is impossible to produce net gains for society by altering the mix of goods and services produced. The goods and services produced are those that society most wants to consume. The marginal cost and marginal benefit of producing each unit of output is equal.
What will happen to a firm that finds a way to lower production costs through better technology or improved organization?
Its profits will increase.
What are the effects of the "invisible hand" in a purely competitive economy?
Maximum profits for individual producers Resource allocation that maximizes consumer satisfaction
Economic profit will fall to zero and firms will choose not to enter an industry when price is equal to which of the following factors?
Minimum average total cost Marginal cost
How does a purely competitive market restore allocative efficiency when an increase in demand disrupts efficiency?
New firms enter and increase industry output until price and marginal cost are equal.
In the long run, a purely competitive firm will only earn a ______ profit.
Normal
Which of the following best explains why the long-run supply curve of a constant-cost industry is perfectly elastic?
The entry and exit of firms changes industry output bringing the price back to its original level, where it is equal to the constant minimum ATC
Which of the following occur only in the long-run?
The expansion or contraction of plant capacity The entry and exit of firms
An industry where expansion or contraction will not affect resource prices and production costs is known as a(n) ______.
constant-cost industry
The difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay is known as _____.
consumer surplus
In purely competitive markets, efficiency can be temporarily disrupted and then restored by changes in:
consumer tastes. technological changes. resource supplies.
The transformative effects of competition are often referred to as:
creative destruction
If demand for the good decreases creating economic losses, firms will exit the industry in the long run. As firms exit in the long run, industry supply will ______ and market price will ______.
decrease; rise
Strategies attempted by firms for increasing their profits include:
developing a new product that is popular with consumers. lowering production costs through improved business organization. lowering production costs through better technology.
When efficiency is disrupted in pure competition, producers will reallocate resources until product supply is such that price will again _____ marginal cost.
equal
A constant-cost industry is one where ______ will not affect resource prices and production costs.
expansion or contraction
There is no incentive for firms to enter or exit the industry in the long run when ______.
firms earn a normal profit price equals minimum average total cost MR = MC
A decreasing-cost industry is one in which firms experience ______ costs as their industry ______.
higher; contracts lower; expands
The shape of the long-run supply curve for a constant-cost industry can best be described as:
horizontal
The entry of new firms entering an increasing-cost industry increase resource prices particularly:
in industries using specialized resources whose long-run supplies do not readily increase in response to increases in resource demand
Productive efficiency requires that goods be produced ___.
in the least costly way
In an increasing-cost industry, increases in resource prices and the minimum average total cost (ATC) are a result of ______.
increases in product demand resulting in economic profits and industry expansion
Competitive market economies generate ______.
productive efficiency allocative efficiency
All firms in a(n) ______ industry share the same basic efficiency characteristics.
purely competitive
A purely competitive market leads to the efficient use of:
society's scarce resources
After all long-run adjustments are completed in a perfectly competitive market, output will occur at each firm's minimum average ______.
total cost where product price is equal to marginal revenue
