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Chapter 2

ECON 1010 Chapter 2: Topics 12

3 Pages

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ECON 1010
Laura K.Brown

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o982 ECON1010 A society should facilitate markets in their quest of maximizing social surplus and achieving Pareto efficiency. But once this objective is achieved (the social pie is maximized), society should consider how to redistribute the surplus in order to realize other goals, such as equality of resources and opportunities. LONG RUN (The Invisible Hand) Pushing firms to produce at the lowest possible total cost likely to happen in the long run; a period of time where: 1. Existing firms can adjust all their factors of production and perhaps exit 2. New firms can enter the market If firms in a market are making positive profits, there is an incentive for new ones to enter the market. An increase in number of firms shift supply curve to the right, reducing equilibrium price and profit due to change in equilibrium price. Note: Firms in a perfectly competitive market are price takers, and so they just take the new equilibrium prices as given. Hence reduction in profit Example: all firms have the same productive technology. Therefore, cost curves are also identical. In this case, entry will continue until the point where all the firms in the market are making exactly zero profit. Note: at this long run equilibrium price each firm produces a quantity such that the average total cost (ATC) is minimized. The long run equilibrium price is then just equal to the minimum ATC.
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