MicroeconomicsLesson 3 of 4 in the course Perfect Competition

Competitive Entry, Exit, and Long-Run Industry Supply

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

This lesson explains how economists distinguish the short run from the long run and why firms respond differently to profits and losses over these time horizons.

The terms short run and long run do not refer to a fixed number of days or months. The time it takes to adjust depends on the specific business. A factory may need years to expand, while a small service business may be able to adjust much more quickly.

All flashcards

Short run
A period in which a firm cannot adjust at least one input.
Long run
A period in which a firm can adjust all factors of production.
Economic profit
Revenue minus explicit and implicit costs, including opportunity costs.
Short-run shutdown
A temporary production stoppage; the firm has not necessarily left the industry.
Long-run supply curve
The relationship between market price and quantity after long-run industry adjustment.

Quiz questions

  1. When new firms enter a competitive industry because existing firms are earning economic profits, what typically happens to market supply and price?Answer: Supply increases, putting downward pressure on price.
  2. When might a firm temporarily shut down production in the short run to limit its losses?Answer: When price is below average variable cost.
  3. In long-run competitive equilibrium, where does a firm produce, and what is its economic profit?Answer: At minimum average total cost, with zero economic profit.
  4. What happens as output expands in an increasing-cost industry?Answer: Production costs rise, and the long-run supply curve slopes upward.
  5. What characterizes a decreasing-cost industry as its output expands?Answer: Production costs fall, and the long-run equilibrium price declines.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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