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OU ECON 1123 - Cost Industries

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ECON 1123 1st Edition Lecture 14 Outline From Previous Lecture (Lecture 13)I. Economic LossesII. Short Run Losses and Average Variable CostsIII. Firm and Market Supply in the short runOutline Lecture 14I. Cost IndustriesII. Pure Competition ConclusionsLecture 14 NotesI. Cost IndustriesPrice 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 behaviorNow 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 againSo, 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 oneDecreasing 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 firmII. Pure Competition ConclusionsThese 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) minimum2. Competitive Markets are productively efficient because goods are produced at their lowest opportunity costs3. Competitive markets are attractively efficient because P=MC and consumer surplus and producer surplus are


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