ECON 201 Chapter 11

What are the effects of the "invisible hand" in a purely competitive economy?

Maximum profits for individual producers Resource allocation that maximizes consumer satisfaction

A decreasing-cost industry is one in which firms experience ______ costs as their industry ______. (Check all that apply.)

lower; expands higher; contracts

All firms in a(n) ______ industry share the same basic efficiency characteristics.

purely competitive

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

There is no incentive for firms to enter or exit the industry in the long run when ______.

MR = MC price equals minimum average total cost firms earn a normal profit

What must be eliminated or avoided if the "invisible hand" is to produce socially optimal outcomes in purely competitive markets?

Externalities

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.

True or false: Higher resource prices create lower ATC and cause an upward shift of the long-run ATC curve.

False

____________ 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 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. resource supplies. technological changes.

An unfavorable shift or ______ in demand will upset the original industry equilibrium and produce ______.

decrease; losses

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

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

Higher resource prices will result in ______ total costs.

higher average

The entry and the exit of firms in an industry are considered to be __________ -run adjustments.

long

long-run supply

A schedule or curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run.

_____________ 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

constant-cost industry

An industry in which the entry and exit of firms have no effect on the prices firms in the industry must pay for resources and thus no effect on production costs.

____________ (Allocative/Productive) efficiency means that goods are produced in the least costly way.

Productive

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 marginal cost and marginal benefit of producing each unit of output is equal. The goods and services produced are those that society most wants to consume.

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.

What will happen to a firm that finds a way to lower production costs through better technology or improved organization?

Its profits will increase.

The entry and the exit of firms in an industry are considered to be ________ -run adjustments.

Long`

Which of the following does a decreasing-cost industry experience?

Lower costs as industry output expands.

In the long run, a purely competitive firm will only earn a ______ profit.

Normal

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?

Price or marginal revenue will settle where it is equal to minimum average total cost. In the long run, an equality occurs where price equals marginal revenue, which equals minimum average total cost. In the long run, a multiple equality occurs where price equals marginal cost which equals the minimum average total cost.

A competitive firm may realize an economic profit or loss in the __________ run but will earn only a normal profit in the __________ run.

Short long

Which of the following occur only in the long-run?

The expansion or contraction of plant capacity The entry and exit of firms

True or false: Efficiency within pure competition can be temporarily disrupted by a change in consumer tastes.

True

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.

A constant-cost industry is one where ______ will not affect resource prices and production costs.

expansion or contraction

Productive efficiency requires that goods be produced:

in the least costly way.

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

The long run, every purely competitive firm tends to operate at its ______.

minimum ATC

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