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10 -- Part 5: Understanding Monopoly
When participants in losses convey information that the market makes zero economic profit, there is no adjustment.
The market is long run about the profitability of equilibrium.
Existing firms and entrepreneurs are not interested in entering or exiting markets.
A competitive market helps existing firms and entrepreneurs to produce more goods and services that society values.
Firms are encouraged to leave because of losses.
Without profits and losses acting as signals for firms to enter or exit the market, resources will be misallocated and surpluses will occur.
The market supply is determined by entry and exit.
The minimum point on the ATC curve is where the profit- maximizing point of the individual firm is located.
Profits are zero because ATC is enough to cover costs.
New firms have no incentive to enter the market and existing firms have no reason to leave.
ATC firms will earn a profit at all prices below P. Firms will expe rience a loss.
All markets with free entry and exit have the same picture; zero economic profit occurs at only one price, and that is the lowest point of the ATC curve.
The supply curve in panel (b) must be a horizontal line.
Firms would enter and supply would increase if the price were higher.
Firms would exit, supply would decrease, and price would be forced up to P. The long- run supply curve must be equal to P in order to take place in the long run.
The demand exists at this price.
You may not think a competitive market is a good place for businesses to make profits now that you have learned how competition affects profits.
Entry into the market and exit from it force the long- run price to be the same as the average total cost curve.
ATC firms will earn a profit at all prices below P. Firms will experience a loss.
The long- run supply curve must be horizontal.
Firms would leave the market if the price was higher or lower.
Firms enter a market when they are compensated fairly for their investment.
They leave the market when the investment doesn't work out.
Economic profit is determined by taking the costs out of revenue.
This chapter focuses on our benchmark, economic profit.
The difference between accounting profit and economic profit can be seen in Table 9.6.
During the year, the plow has a revenue of $25,000.
Plow asked his accountant how much the business earned during the year, the accountant added up all of Mr. Mr was reported back by the accountant.
The plow made between $25,000 and $10,000 in profit.
The money Mr. has not been accounted for.
The money he invested in the business could have been better spent on other things if he had worked another job instead of plowing.
The economic profit is $25,000 - $10,000 - $15,000 if we add in the implicit costs.
Zero profit is not unattractive.
It means that Mr. is a person.
His next- best investment alternative was covered by Plow.
You might as well stay in the same place if you can't make any more money doing something else.
Plow is content to keep plowing, while others outside the market do not see any profit from entering the market.
In the long run, the best the competitive firm can do is earn zero economic profit, because profits and losses may exist in the short run.
The adjustment process leads to long- run equilibrium.
The minimum point on the ATC curve is represented by Panel (a).
Firms are operating as efficiently as possible.
The economic profit for the firm is zero because the price is equal to the average cost of production.
The market is in equilibrium because the short- run supply curve and the short- run demand curve intersect along the long- run supply curve.
If the short- run supply curve and demand curve intersect above the long- run supply curve, the price would be higher than the minimum point on the ATC curve.
The result would be short- run profits, indicating that the market is not in equilibrium.
The short- run supply curve and short- run demand curve intersect along the long- run supply curve when the market is in long- run equilibrium.
The price that the firm charges is equal to the minimum along the average total cost curve.
There is no incentive for firms to enter or leave the market because existing firms earn zero economic profit.
The result would be losses.
The market demand curve shifts from D1 to D2.
When demand goes down, the equilibrium point goes from point A to point B.
The firms in this market take their price from the market, so the new marginal revenue curve shifts down from MR1 to MR2 at P2 in panel.
The firm will produce an output of q2 if MR2 is MC.
When the output is q2 the firm's costs, C2, are higher than the price it charges, P2, so it experiences a loss equal to the red area in panel.
The firm is not as efficient because it is no longer producing at the minimum point on the ATC curve.
Firms can exit the market easily.
Some people will do that to avoid further losses.
The equilibrium of the market supply contracts and the market output moves from point B to point C as firms exit.
The firms that remain in the market do not experience a short- run loss because MR2 returns to MR1 and costs fall.
The firm is once again efficient and economic profit returns to zero.
A decrease in demand causes the price to fall in the market.
The firm can charge P2 because it is a price taker.
MR2 and MC intersect at q2.
The firm incurs a short run loss at this output level.
There is a decline in demand for mangos due to a rumor that they are linked to a salmonella outbreak.
The price of mangoes goes down when demand goes down.
Some mango growers will exit the market, the mango trees will be sold for firewood, and the land will be converted to other uses in response to the negative profit.
The supply will contract with fewer mangoes being produced.
We assumed the long- run supply curve was horizontal to keep the previous example simple.
This is not always the case.
There are two reasons why the supply curve may go upward.
The product may only be available in limited supplies.
A mango grower needs to acquire more land to plant more trees.
Mangoes grow in tropical areas with warm, wet summers, so not all land is suited to growing them.
Some firms exit the market because of the long run adjustment.
The MR2 curve in panel shifts up and down until the price returns to long- run equilibrium.
The firm is earning zero economic profit.
The opportunity cost of the labor used in producing the good is one of the reasons the long- run supply curve may be upward sloping.
If you want to produce more mangoes, you will need more workers.
Finding people who are willing and capable will be part of hiring extra workers.
Some workers are better at picking fruit than others.
As your firm attempts to expand production, it must increase the wage it pays to attract additional help or accept workers who are not as capable.
This discussion means that higher prices are needed to get suppliers to sell more.
We have discussed the basic ideas in this section.
The market supply curve is more elastic in the long run because of the entry and exit of firms.
Two couples who are best friends are in the most unlikely situations on the show.
The Mertzes get tired of doing all of the hard work and Ricky and Lucy meet and greet the guests.
The tomer's ear gives him a dollar.
Two couples decided to part ways.
The result is hilarious.
The falling prices affect guests going to A Little Bit of Cuba.
The exchange is a way to show how competitive the markets are and how both restaurants use the same facilities.
The only way they can lower the price is by lowering their prices.
The result is a messy exit.
In the long run, a firm in a perfectly competitive market earns profits.
Accounting profits only cover the costs of doing business, so they are positive.
The economic profit will be lower than the accounting profit once the implicit costs are taken into account.
The long- run equilibrium will be reached if the implicit costs are equal to the accounting profit.
The economic profit will be negative if a firm earns zero accounting profit.
Firms exit the market when economic profit is negative.
Firms outside the market can enter when a firm earns an economic profit.
There is no incentive to enter or exit the market.
Zero economic profit means that the firm can cover its costs.
It means that firms inside the market are content to stay and that firms outside the market don't see the value in entering.
Firms control the prices they charge.
In competitive markets, firms are at the mercy of market forces that set the price charged throughout the market.
Individual firms have no control over the price because they sell the same products as their competitors.
Economic activity in competitive markets is regulated by profits and losses.
Entry into a market is encouraged by profits.
Producers who operate inefficiently or produce goods that consumers don't want are punished by losses.
Exit from the market is encouraged by losses.
Resources flow into markets that are undersupplied and away from markets where too many firms exist through the process of entry and exit.
We studied competitive markets to establish a benchmark that will help us understand how other market structures compare with this ideal.
We will look at imperfect markets in the next few chapters.
The closer a market is to perfect competition, the better the result for consumers and society in general.
Similar products are sold by firms in competitive markets.
Firms can enter and exit the market whenever they please.
A price taker doesn't have a say in the price it gets in the market.
Market forces determine the price and quantity produced in competitive markets.
The profit- maximizing rule states that a firm maximizes profits by expanding output until marginal revenue is equal to marginal cost.
The profit- maximizing rule can be used to stop production when there are no profit opportunities left.
If the price the firm gets does not cover its average variable costs, it should shut down.
If a firm can make enough to cover its variable costs in the short run, it will continue to operate.
The firm should go out of business if it can't cover its costs.
Firms enter or leave a market based on profits and losses.
Competitive markets cause economic profit to be zero in the long run.
The entry and exit of firms ensure that the market supply curve is more elastic in the long run than it is in the short run.
You need a plan to start your own business.
80% of small businesses fail within five years because they were ill conceived or relied on unrealistic sales projections.
Determine how long it will take you to break even.
If you don't break even, you could run out of money and have to close your doors before you make a profit.
You have to cover your explicit expenses with your revenue.
Make sure your business plan covers the essential competitive market where long- run profits are points.
It's important to keep your start- up costs low.
Consider is a limited liability corporation that invests as much of its own money as possible.
It protects business owners from personal liability.
It could be price, better service, paying back your loans with the profits from your new a better product, but it has to be something.
Don't do business, think again.
It can take a long time to be successful if you can't make money.
The right people will help you.
Slowly remember what your business is about.
You should protect yourself from risk.
If you are a sole proprietor.
If you have business debts and judgments, and who is better at them, do the best you can to lighten the load on others.
Once you find the right people, you will like your home and savings accounts.
To protect help, treat them well and provide an environment in which they can thrive, you can incorporate what they will thrive and give their all.
Under what circumstances will a firm have their own experience?
Explain why each of the following is different at each rate of output.
The MR = MC rule can be used to calculate the profit- maximizing rate of output.
If you want to calculate the marginal revenue and one size, you have to do it first.
The maximization of output is achieved at what prices the mine is open.
To answer the questions, use the graph.
A firm is losing money.
Below are the schedules shown.
The individual supply curves can be drawn.
The market supply curve can be drawn.
The firm does not have a fixed answer.
Barney's snow removal service is a competitive firm.
The first thing we do is calculate the total cost.
We struck out and had an explanation below.
The marginal cost is what we find next.
One more unit will be produced by the AVC MR.
The total cost of producing 101 boxes is subtracted from the total cost of producing 100 boxes.
A loss of $0.51 would be created by the 101st box.
The ATC and AVC curves did not produce the 101st box.
Many students disagree with this problem.
The profit- maximizing ing problem requires marginal thinking from this chapter.
We know the profit- maximizing rule, rule, MR, and it is clear that this is the case.
The only thing we need to do is compare the output to the addi MR and MC, which are both $10, if the output is 2.
The answer to see if the deal is a 2 would be incorrect.
The profit- maximizing rule is often overlooked, so we know that MR is $1.50, but MC is increasing.
We need to see why 2 isn't the profit- maximizing output, calculate the marginal cost of producing you should calculate the profit in a fourth box.
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