OU ECON 1123 - Cost Industries (2 pages)

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Cost Industries

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Cost Industries


This lecture covered different types of cost industries as well as pure competition conclusions

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The University of Oklahoma
Econ 1123 - Princ. of Econ-Micro
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ECON 1123 Edition 1st Lecture 14 Outline From Previous Lecture Lecture 13 I Economic Losses II Short Run Losses and Average Variable Costs III Firm and Market Supply in the short run Outline Lecture 14 I Cost Industries II Pure Competition Conclusions Lecture 14 Notes I Cost Industries Price for an individual firm is established by an industry and the firm is the price taker This Price is also the firms demand and marginal revenue schedule Note when you draw these graphs the whole marginal cost schedule is not included because you do not draw the rest that is past the shut down point Initial equilibrium will be at Po and Qo zero economic profits since price is equal to average total cost under these circumstances the firm had no reason to change its behavior Now if market or industry demand increases then the price will increase and the quantity supplied at that price will increase which means that they will have positive economic profits Price ATC With positive Economic Profits new firms enter the industry i e there are now more sellers in the market or industry This will drive the price down again So short run response the price will increase but long run response new firms will start popping up and the price will decrease again Constant Cost Industry as firms enter or exit the average total cost of the representative firm remains Constant Increasing Cost industry As firms enter or exit the ATC of the representative firm increases from ATC zero to ATC one Decreasing Cost Industry As firms enter the industry drawn by positive economic profit the ATC of the representative firm actually decreases due to technology An example of a decreasing cost industry would be a natural monopoly where there is just one great big firm II Pure Competition Conclusions 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 1 Competitive firms are efficient because P MR MC ATC short run minimum ATC long run minimum 2 Competitive Markets are productively efficient because goods are produced at their lowest opportunity costs 3 Competitive markets are attractively efficient because P MC and consumer surplus and producer surplus are maximized

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