In the long-run equilibrium of a competitive market with...

Key Concepts

Perfect Competition

Perfect competition is a market structure characterized by many small firms, homogeneous products, free entry and exit, and perfect information. In such markets, firms are price takers, meaning they cannot set prices but rather must accept the market-determined price.

Long-run Equilibrium

Long-run equilibrium occurs when all firms in a competitive market earn zero economic profit, which implies that there is no incentive for firms to enter or exit the market. In this equilibrium state, firms operate at a scale where their cost structures are optimized and no abnormal profits exist.

Marginal Cost

Marginal cost (MC) is the additional cost incurred by producing one extra unit of output. In competitive markets, firms maximize profit by producing up to the point where the price equals the marginal cost, ensuring that the cost of making an additional unit is exactly covered by the revenue it generates.

Average Total Cost

Average total cost (ATC) is calculated by dividing total production costs by the quantity of output produced. In long-run competitive equilibrium, market forces drive the price to the level of the ATC, meaning that firms are producing at the efficient scale where they break even, earning zero economic profit.

Transcript

00:01 When we're faced with the micro -economics question, and it might look bigger scary, there's a lot of different acronyms, but we need to depend on a few factors to help us break down each component of the problem, so that's easier to answer.

00:15 So we're faced with the problem that asks us to compare the price of a long -run equilibrium of a competitive market with identical firms to its marginal, costs and the average total cost.

00:34 So one more time, the question is asking us if a competitive firm is in the market with a lot of other competitive firms.

00:43 In the long run, what will the relationship between its price and its marginal cost be? and what will the relationship between the price and the average cost be? so this is obviously a firm behavior problem.

00:57 In these types of problems, we might be comparing the costs.

01:00 Or the labor or even the resources that go into producing into many different markets.

01:10 So let's jump into it.

01:12 The first thing that we'd like to find is the market type that we're dealing with this question.

01:16 So the question asks us, so in the microeconomic theory that we're dealing with, there are four different types of market models.

01:26 So the first one is a perfectly competitive, it's a perfect competition.

01:30 In this type of market model, there are many competitors.

01:34 The sellers or the producers in this case are price takers in that they take their price from the consumers.

01:42 And there is low to no barrier entry into the market.

01:46 Second type of market model is monopolistic.

01:49 In this case, there is only one seller or producer, and they are a price maker.

01:55 They make the price so that they're...

02:00 That their consumers can only take it at that, can only take the product at that price.

02:06 And there's very large barriers to entry here in this case.

02:10 Third type is an oligopoly, very close to monopolistic competition.

02:16 Another word for an oligopoly is a cartel.

02:20 In this case, there is a couple of sellers, but they have a lot of market power, and they are a price maker.

02:30 The last case is a monopolistic competition, which is a lot of firms, but they also are price takers.

02:38 And in this case, they can differentiate and they can segment the population based on price.

02:44 So in this case, we're dealing with a long -or equilibrium of a competitive market with identical firms.

02:50 This is a perfect example of a competitive firm, of a perfect competition firm.

02:56 So that's the market model that we're dealing with.

03:10 So moving on, the second thing we'd like to address when dealing with these types of problems is to define any type of complex acronym or jargon that is being set inside.

03:23 So for this problem, the first and the main variable we're dealing with is p, it's the price.

03:33 So this is in a competitive market, the price is what the seller or the producer wants it to be...

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