ECN 203 1st Edition Lecture 7Outline of Last Lecture II. The MC and the Firm’s Q^sIII. The Firm in the Market IV. Marginal and Average a. The RelationshipV. The Marginal Cost and Average Cost Curves VI. Profit a. Total revenueb. Total costc. Profit VII. Dynamics of Perfect Competition VIII.When the profit is gone IX. InnovationOutline of Current Lecture X. The Market’s Response to Profits XI. Profit, market signaling, and the invisible hand XII. Efficiency and the Invisible Hand Current Lecture6.1.7 – 6.1.9- The Market’s Response to Profits o A positive profit is realized when total revenue is greater than total cost. All firms want a profit, but it is not necessary to stay in businesso Costs = a normal return for the owner As long as the firm is covering its costs its ok to stay in business It is covering its opportunity cost o Anything above a normal return is just extra o Profits serve as a signal in the market system These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. As profit still exists, more competitors will join, causing the price to rise and fall. - Profit, market signaling, and the invisible hando Under perfectly competitive conditions firms seek profit, but they end up earning only a normal return o In a case where firms are suffering losses, the firms aren’t making enough to cover their normal return, so they have to exit the market This shifts market supply up and raises the market price Exit will continue until the losses are gone o Under perfect competition, normal returns are the norm. - Efficiency and the Invisible Hand o New entrants into the market expand market supply – this lowers the price. As the price falls, profit of the individual firms get squeezed o But so long as profits exist new competitors enter in the pursuit of a positive profit, not just a normal return. this will only end when the expansion of supply lowers the market price to a level that squeezes all profits out of the market - when p=AC- it is the lowest point on the average cost curve At this point, it is the most efficient way to produce this product.o In the pursuit of profits, all firms are driven to produce at a level that realizes min. avg cost That is the most efficient level of production. Under our nice assumptions, the dynamic of a perfectly competitive market forces every firm to charge the lowest price consistent with making a living – a normal
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