ECN 101 Chapter Notes - Chapter 10: New Product Development, Economic Surplus, Creative Destruction
Chapter 10
ECN 101
november 8th
Perfect competition in a long run
1. efficiency is achieved
2. productive efficiency (producing where P = min. ATC)
3. Allocative efficiency where P = MC
4. In perfect competition with productive and allocative efficiency are achieved
Profit maximization in the Long Run
1. Entry and Exit Only
In a long run, p = min ATC because:
1. Entry eliminates profit
-If P>ATC, firms enter
-Supply increases
-Price falls to min ATC
2. Exit eliminates losses
-If P<ATC firm exit
-supply decreases
-price rises to min ATC
Consumer Surplus - difference between what a consumer is willing to pay for a good and what
the consumer actually pays. Extra benefit (extra money left)
max price willing to pay - actual price = consumer surplus
Producer Surplus = actual price - min acceptable price
Both consumer and Producer surpluses are maximized
Dynamic Adjustments
1. Perfectly competitive markets will automatically adjust to:
-changes in consumer tastes
-resource (factor) supplies
-technological change
Entrepreneurs would like to increase profits beyond just a normal profit
1. Decreased cost by innovation - it is drive to decrease costs, thus maximize profits, that
drives innovation
2. New product development - in an effort to increase profit. i.e. Apple’s iPad, iPhone
Creative Destruction
•Competition and innovation may lead to “creative destruction”
•Creation of new products and methods destroys the old products and methods
•New firms and products are created as previously exiting firms and products are replaced.
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